Bank Rate on hold, but markets expect May hike

Click to follow
The Independent Online

The Bank of England's "emergency" policy of ultra-low interest rates marked its second birthday yesterday when the Bank's Monetary Policy Committee voted for the 24th month to leave rates on hold, and also to keep the £200bn programme of quantitative easing unchanged. The apparent calmness of policy, however, belies what the Bank admits is an "unusually wide range of views" on the MPC, which split four ways in January.

The decision came as further evidence emerged of a strengthening in the manufacturing sector of the economy. Market expectations of a rise of 0.25 percentage points in Bank Rate to 0.75 per cent at the May MPC meeting hardened yesterday, as by then GDP in the first quarter of 2011 will be known, as will the contents of the 23 March Budget. Much attention will focus on the minutes of the MPC session, to be published in 10 days' time.

The Office for National Statistics said yesterday that its index of production showed that manufacturing output rose by 1 per cent in January, more than compensating for December's 0.1 per cent drop. Industrial production more widely, which includes North Sea oil and gas, rose by a smaller 0.5 per cent, reflecting the way households cut back their energy usage after the extraordinarily cold winter. Year on year, manufacturing activity was 6.8 per cent higher than a year ago – the best growth rate since 1994.

Graeme Allinson, the head of manufacturing at Barclays Corporate, said: "It remains somewhat disappointing that we are still seeing little in the way of major capital expenditure or M&A activity amongst Britain's manufacturing sector this year."

Yet the service sector – comprising 70 per cent of the economy – remains much weaker by most accounts. The National Institute for Economic and Social Research, a well-respected independent body, said yesterday that output in the economy more broadly rose a little in February, and by 0.2 per cent in the three months ending in February. However,"the underlying quarterly growth rate of the economy remains below its trend and the output gap is likely to be widening".