Bank of England retains its base rate at 0.5% amid pressure due to the UKís current period of economic growth


September 2014

Bank of England retains its base rate at 0.5% amid pressure due to the UKís current period of economic growth

The Bank of Englandís Monetary Policy Committee (MPC) has voted to retain interest rates at 0.5% for the 66th consecutive month, reflecting its lack of conviction in the durability of the economic growth the UK is currently undergoing.

The decision to maintain the base rate comes after the MPCís split decision over whether or not to raise it last month. It could be that fears surrounding low wage growth and the stuttering housing market resurgence contributed to their judgement. The BoEís flagship rate-setting body also voted to maintain the amount allocated to their quantitative easing scheme at £375bn.

The timing of the hotly-anticipated interest rate hike has sparked much debate in recent times, amongst policymakers and the public alike, as the cost of borrowing and the potentially negative impact it would have on small businesses and lenders alike would notably intensify. As such, despite a lack of unanimity in the MPCís last vote over a base rate hike, the general consensus across the financial sector is that the majority of the rate-setting body will not agree to increase interest rates til early 2015.

David Kern, top economist at the British Chambers of Commerce (BCC) commended the MPCís latest decision, lauding their prudential approach to the matter.

"While wage pressures are still weak and inflation is below target, calls for early interest rate rises are unjustified. A large number of people are working part time because they are unable to find a full time job ñ which contradicts the view that there is no spare capacity in the economy," he stated.

This perspective was also adopted by Yael Selfin, economics director, at KPMG who stressed that current indicators of economic growth are merely a prelude to further progressive developments for the UKís GDP.

ìWith inflationary pressures still subdued, it is no surprise that rates have been held:î said Mr Selfin

"Despite recent revisions to GDP and productivity, there is still room for further improvements in productivity, to mop up some of the rise in demand over the coming months. Steady falls in unemployment and strong economic growth are likely to see rates rising in February next year.î

Some critics also point to the number of people in part-time work due to their inability to secure permanent employment invalidating the claim that there the UK economy has run out of steam. Others view the increasing value of the pound sterling over the past year, and the subsequent dampening effect it has had on UK export, as grounds enough for the upholding of the BoEís record low base rate.

The reality is that our industrial sector are still growing at a snailís pace, yet to revive itself to its status before the financial crisis. Moreover, wage growth remains stagnant, with last monthís data from the Office for National Statistics (ONS) showing that wages dropped for the first time since 2009 by 0.2%.

Many households are already struggling to cope with rising energy prices, and with Halifaxís latest data forecasting that a 0.25% rise would raise an average homeownerís mortgage by £250 a year, a premature interest rate rise could destabilise the currently growth the UK is enjoying. If rates were to return to pre-recession levels of 3%, the average yearly mortgage payment would be over £2500 more expensive than it is at present.

However, certain members remain unconvinced by the MPCís latest decision, believing there could be a case for a base rate hike much sooner rather than later. Andrew Goodwin, senior economic adviser to the EY ITEM Club, appeared reflective on the matter.

"On one hand, the stronger performance might convince some members that the economy is sufficiently robust to withstand the steady tightening of policy, although it should be noted that the Bank routinely builds into its forecasts the expectation of some upward revisions to the recent historical data," said he said.

"On the flip side, the revisions also provide some ammunition for those of a dovish persuasion, with evidence that a stronger productivity performance has had little feed through into inflationary pressures.î

Certainly food for thought for the hungrier minds out there.