Bank of England leaves interest rates on hold once again as negative inflation keeps hawks at bay

The Bank of England has left interest rates on hold today following its first policy meeting since official figures showed UK inflation turn negative for the first time in 55 years.

Ultra-low inflation has pushed back expectations of when the Bank will start to raise rates, which have remained at 0.5 per cent for more than six years, while the latest economic data appear to have killed off any chance of a hike coming sooner.

Housing market data released today saw British house prices edged lower in May, in line with economists’ expectations, but the annual rate of growth inched up to its highest level so far this year, according to data from mortgage lender Halifax.

Halifax said house prices dropped by 0.1 per cent in May compared with a 1.6 per cent surge in April, while the year-on-year rate of growth in the three months to May picked up to 8.6 per cent from 8.5 per cent.

James Knightley of ING Bank said: ‘The Bank of England has left monetary policy unchanged as universally expected given the fact that inflation is in negative territory and growth was a disappointing 0.3 percent in 1Q15 (the first quarter of 2015).

‘It is possible that the minutes will subsequently show the two relative hawks on the MPC, Martin Weale and Ian McCafferty, are getting closer to voting for a rate rise given the ongoing strengthening of the labour market and rising wages.

‘For now though we suspect that they opted for the status quo, particularly given recent financial market volatility and the strength of sterling.’

Minutes of this month’s MPC meeting are due to be published on June 17.

Yesterday a closely-watched CIPS/Markit purchasing managers’ index survey signalled a sharp slowdown in growth for the dominant services sector last month, pouring cold water on hopes that the pace of Britain’s economic recovery could bounce back in the second quarter after a weak start to the year.

Markit chief economist Chris Williamson said: ‘With inflation falling negative for the first time since 1960 and surveys signalling a surprise slowing in the rate of economic growth in May, the case for hiking rates has evaporated, for now at least.

‘However, it would be rash to also rule out the possibility of an initial rate hike taking place by the end of this year if we see the economy start to pick up momentum again in the summer months, as it seems likely that the general election-related slowdown will fade and price pressures continue to build.’

Official figures last month showed Consumer Price Index inflation fell to minus 0.1 per cent in April, in line with the Bank’s expectations, down from zero – or flat average prices – in March.

But policymakers expect CPI to turn ‘notably’ higher at the end of this year and will the Bank keep a close eye on its path further down the track as it tries to avoid inflation accelerating past its 2 per cent target.

In its quarterly inflation report last month, the Bank broadly indicated that it was likely to hike the cost of borrowing in the middle of 2016.

Peter Cameron, assistant fund manager at Ecclesiastical Investment Management said: ‘Barring a short-lived rate hike at the outbreak of the Second World War, interest rates remained at 2 per cent for 19 years between 1932 and 1951.

‘While we are unlikely to come close to that record, it is difficult to envisage any rise this side of Christmas.

‘Wage growth may finally be showing signs of life and inflation could also rise in the second half of 2015 as last year’s decline in the oil price drops out of the numbers, but the economic recovery is still unsteady.’

Howard Archer, chief UK and European economist at IHS Global Insight, said: ‘We expect the Bank of England to eventually start edging interest rates up in the first half of 2016, and we think it is currently borderline as to whether the Bank first acts in the first or second quarter.

‘We have scaled back our expectation of monetary policy tightening over the longer-term and we now see interest rates only reaching 2.0 per cent by the end of 2017.’

But ‘hawks’ on the nine-member Monetary Policy Committee argue that the question of whether to raise rates now or leave them on hold is ‘finely balanced’.

Two members voted for a hike in rates for a number of months at the end of last year but, since then, sinking inflation has seen a return to all nine members agreeing to leave rates as they are.

The Bank will also want to avoid knocking Britain’s fragile recovery off course amid signs that it is already slowing down.

Recent official figures confirmed that gross domestic product growth slowed to 0.3 per cent in the first quarter, its worst performance since the end of 2012.

The Bank has said it expects this to be revised up, but in its latest economic forecasts, published last month, it slashed its expectation for growth over 2015 as a whole to 2.5 per cent from 2.9 per cent.

Yesterday leading international think tank, the Organisation for Economic Co-operation and Development said the UK is set for growth of 2.4 per cent in 2015 – less than the 2.7 per cent it previously expected but still stronger than the rest of the Group of Seven leading global nations.

Although it added that chancellor George Osborne should spread austerity over a longer period than planned to avoid damaging the economy.

Craig Erlam, senior market analyst at Oanda said: ‘The UK may appear on the path to a sustainable recovery but many things are still missing from it, most notably wage growth, productivity growth and balance.

‘Moreover, the economy has been cooling and there are a number of headwinds facing it in the coming 12 months including fiscal tightening and a stronger pound, the effects of which the BoE will probably want to see before it begins raising rates.’

The OECD also slashed its growth forecast for the US yesterday to 2.0 per cent from 3.1 per cent and warned that the global economy is ‘muddling-through’.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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