Bank rate on hold, but City expects rise in May
As was widely expected, the Bank of England's Monetary Policy Committee (MPC) left interest rates on hold yesterday at 0.5 per cent – but analysts are warning that the next move in rates will be upwards and could come as soon as next month: the long reign of ultra-low interest rates is drawing to a close.
Next month's MPC meeting will probably see a rise of 0.25 percentage points in the Bank rate, City economists say, for a number of tactical reasons. The early estimate of growth for the first quarter will be out on 27 April, and any announcement on rates will be swiftly followed by the latest Inflation Report, which allows the Bank ample opportunity to explain the next move in the interest rate cycle. The Bank last increased rates in July 2007.
Bank rate has been held at its 315-year low since March 2009 and the £200bn programme of quantitative easing has been paused since December that year – representing an unprecedented monetary easing that was designed to deal with the imminent threat of deflation, further banking collapses and the worst slump in three-quarters of a century.
But persistently high inflation – forecast by the Bank itself to reach 5 per cent soon – and market expectations of "normalisation" before much longer are forcing the Bank's hand. The basic judgement seems to turn on whether the evidence of rising inflationary expectations will be converted into higher wage settlements, and whether the imported inflation and rises in VAT that have been responsible for the bulk of the rise in prices will trigger a domestic wage-price spiral.
The three "hawks" on the MPC who have voted for a rise believe that the dangers of that are too great to leave rates alone; the other six, including the Governor, Mervyn King, point to the continuing fall in real-terms wage rates, ironically because inflation is so high.
Subscribe to Independent Premium to bookmark this article
Want to bookmark your favourite articles and stories to read or reference later? Start your Independent Premium subscription today.
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies