Cost of borrowing set to stay on hold, but next year could see rise

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Half a decade of emergency low interest rates will be marked 
this week when Bank of England policymakers vote once more to keep the cost of borrowing on hold.

But the decision – which comes on the five-year anniversary of the Bank’s decision to slash rates to the lowest level on record – follows a flurry of recent comments from members of the Monetary Policy Committee (MPC) signalling that rates will start to rise from spring 2015.

Martin Weale was the first to say rates were likely to increase in the second quarter of next year, in line with market expectations, in what marked the clearest signal yet from the MPC about the future path of borrowing costs.

But since then, his fellow policymakers have been out in force reiterating the message, with Ian McCafferty saying it was “not unreasonable” to expect rates to rise next spring.

The Bank abandoned its “forward guidance’’ pledge linking the cost of borrowing to unemployment figures last month with a new policy that takes over when the rate of joblessness hits 7 per cent.

The new version – dubbed “fuzzy guidance” – will see its decisions on interest rates instead based on how quickly the economy uses up its spare capacity.

The Bank said at the time it would give no timing on when interest rates would rise, although it did make it clear that market expectations for rates to rise at the start of the second quarter of 2015 – around April – was consistent with its target to keep inflation close to two per cent.

It has also stressed that when rates rise, the increase will be gradual.

Howard Archer, chief economist at IHS Global Insight, said: 
“The Bank of England clearly wants to nurture recovery and 
not to risk choking it off by raising interest rates too early or too 
fast.”

He is predicting that rates will reach one per cent by the end of 2015 and two per cent by the end of 2016.

He added: “The message repeatedly coming from the Bank of England is that while it is encouraged by the economy’s recent strong performance, the Bank is not taking sustained recovery for granted and very much wants to see it become more balanced with business investment seeing sustained improvement and exports increasingly kicking in.”