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Bank of England to keep interest rates at 0.5% for at least another year Bank of England to keep interest rates at 0.5% for at least another year
(about 1 hour later)
The Bank of England has signalled it will keep interest rates on hold at the historic low of 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014.The Bank of England has signalled it will keep interest rates on hold at the historic low of 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014.
Britain's recovery is "as yet is neither balanced or sustainable," said Bank of England governor Mark Carney, as he delivered the Bank's quarterly inflation report on Wednesday. "Activity is still below its pre-crisis level and the household saving rate is likely to fall further," he said, promising that Threadneedle St "will not take risks with this recovery". Britain's recovery is "as yet is neither balanced or sustainable," said Bank governor Mark Carney, as he delivered its quarterly inflation report on Wednesday. "Activity is still below its pre-crisis level and the household saving rate is likely to fall further," he said, promising that Threadneedle St "will not take risks with this recovery".
The report said that a lack of inflationary pressure, spare capacity, and "headwinds" at home and abroad, meant that "bank rate may need to remain at low levels for some time to come".The report said that a lack of inflationary pressure, spare capacity, and "headwinds" at home and abroad, meant that "bank rate may need to remain at low levels for some time to come".
Seeking to reassure businesses and households, the Bank's monetary policy committee said that when rates did eventually go up, they would do so only gradually, settling around 2-3% – below the pre-crisis norm of around 5%.Seeking to reassure businesses and households, the Bank's monetary policy committee said that when rates did eventually go up, they would do so only gradually, settling around 2-3% – below the pre-crisis norm of around 5%.
"Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending.""Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending."
Last summer, Carney announced a "forward guidance" strategy, under which the Bank would consider a rate rise only when the unemployment rate – then 7.8% – fell to 7%. At that time it was not expecting the jobless to fall to the threshold until early 2016. Last summer, Carney announced a "forward guidance" strategy, under which the Bank would consider a rate rise only when the unemployment rate – then 7.8% – fell to 7%. At that time it was not expecting the jobless rate to fall to the threshold until early 2016.
The MPC now expects the next set of official figures to show that the jobless rate fell to 7% in January, forcing it to assess whether the time is right to raise rates for the first time in five years from the all-time low of 0.5%. The MPC now expects the next set of official figures to show that the rate fell to 7% in January, forcing it to assess whether the time is right to raise rates for the first time in five years from the all-time low of 0.5%.
Carney defended his policy, insisting that "forward guidance is working". He said uncertainty about interest rates has fallen and "most importantly, businesses have understood the guidance" with three quarters saying it has boosted their confidence, according to a Bank survey.Carney defended his policy, insisting that "forward guidance is working". He said uncertainty about interest rates has fallen and "most importantly, businesses have understood the guidance" with three quarters saying it has boosted their confidence, according to a Bank survey.
He added that with hindsight, the MPC would still have provided a specific unemployment threshold, despite the fact it will be breached less than six months after it was set.He added that with hindsight, the MPC would still have provided a specific unemployment threshold, despite the fact it will be breached less than six months after it was set.
The Bank expects that wage growth will surpass inflation at some point in the second half of the year – easing the squeeze on household budgets – although it stressed that would be dependent on a pickup in productivity which has been weak in the UK.The Bank expects that wage growth will surpass inflation at some point in the second half of the year – easing the squeeze on household budgets – although it stressed that would be dependent on a pickup in productivity which has been weak in the UK.
"We are not complacent about this recovery at all. We are serene but not complacent. We need to see productivity come in to validate wage expectations," Carney said."We are not complacent about this recovery at all. We are serene but not complacent. We need to see productivity come in to validate wage expectations," Carney said.
In the inflation report, the Bank concluded that there is still spare capacity amounting to between 1-1.5% of national output, that can be absorbed by a growing economy before rates need to rise.In the inflation report, the Bank concluded that there is still spare capacity amounting to between 1-1.5% of national output, that can be absorbed by a growing economy before rates need to rise.
The Bank sharply upgraded its growth forecasts for 2014 to 3.4% from its November forecast of 2.8% – much higher than other predictions from the Office for Budget Responsibility and the International Monetary Fund. The Bank sharply upgraded its economic growth forecasts for 2014 to 3.4% from its November forecast of 2.8% – much higher than other predictions from the Office for Budget Responsibility and the International Monetary Fund.
The February inflation report provided the most detailed forecasts yet from the Bank, which is pencilling in a big surge in both business and housing investment of 11.5% and 23% respectively this year. Consumers are expected to run down their savings to compensate for another year of weak earnings growth.The February inflation report provided the most detailed forecasts yet from the Bank, which is pencilling in a big surge in both business and housing investment of 11.5% and 23% respectively this year. Consumers are expected to run down their savings to compensate for another year of weak earnings growth.
The Bank is expecting the economy to grow by 2.7% in 2015 and by 2.8% in 2016.The Bank is expecting the economy to grow by 2.7% in 2015 and by 2.8% in 2016.