News Column

REPEAT: UPDATE: Bank Of England Holds Rates Steady As Expected

August 7, 2014

LONDON (Alliance News) - The Bank of England once again kept its key rate at a record low on Thursday, sticking to its forward guidance even as the strong pace of economic recovery has augmented speculation for a rate hike late this year.

The nine-member Monetary Policy Committee decided to keep its key bank rate unchanged at 0.50% and the asset purchase programme at GBP 375 billion.

With the strong economic recovery and unemployment falling more sharply than estimated, some members of the panel are likely to have favored a rate hike. The minutes of the previous meeting also signaled that some policymakers are getting closer to a rate hike call.

The current 0.50 interest rate is the lowest since the central bank was established in 1694 and it has heavily reduced the interest income of savers. The unconventional measures were announced during the financial crisis to shore up the economy.

At several instance BoE Chief Mark Carney said the interest rate will have to start rising to maintain price stability as the economy normalizes, but there is no pre-set timing for that action.

Today's decision may not have been unanimous and a rate hike this year cannot be ruled out, said Samuel Tombs, a senior UK economist at Capital Economics. Even so, the outlook of low inflation and sluggish wage growth suggests that interest rates will rise only gradually.

The minutes, due on August 20, will give insight into factors that compelled policymakers to call for an early action. James Knightley, an ING Bank NV economist said he would expect to see one, possibly two members of the MPC having voted for a rate hike at today's meeting.

The bank will explain its assessment on growth and inflation with the Inflation Report, to be published on August 13.

Despite rising employment and strong economic recovery, wage growth remains weak reflecting slack in the labor market, which in turn has kept a lid on inflation. Inflation has remained below the 2% target for a sixth month in June.

Squeezing purchasing power of consumers, earnings excluding bonuses grew at the slowest pace on record during three months to May.

Ongoing very low earnings growth and some signs that growth could be losing a little momentum, support the case for the BoE delaying any interest rate hike until 2015, said IHS Global Insight's Chief UK Economist Howard Archer.

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Source: Alliance News

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