Interest rates stay at record low despite signs of recovery

Interest rates have been held at 0.5 per cent after Bank of England policymakers met for the first time since figures showed the UK had emerged from the six-year downturn.

The Bank of England has held interest rates

Signs of the continued strength of the recovery fuelled speculation that some rate-setters on the Bank’s nine-member monetary policy committee (MPC) might have voted for a hike at the meeting yesterday.

But an overall vote in favour would have surprised markets, with analysts focusing instead on the prospect of a rise towards the end of this year or early in the next.

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Second-quarter gross domestic product (GDP) figures last month showed the UK had finally emerged from its worst downturn since the Second World War as output surpassed its pre-recession peak in early 2008.

The Bank of England has held interest rates

Since then, survey data indicating strong growth in the dominant services sector has added to pressure for a rate rise – though a weaker performance for Britain’s beleaguered manufacturers has led to calls for caution.

Meanwhile, there have been conflicting signals from the labour market, with employment growing strongly but weak wage growth of just 0.3 per cent compared to inflation of 1.9 per cent, which means real-terms pay is continuing to fall.

The signs of economic improvement have led some experts to speculate that one or two members of the MPC could dissent on leaving the Bank rate on hold.

It would be the first split vote on rates since July 2011. But the voting numbers will not be disclosed until later this month.

David Kern, chief economist at the British Chambers of Commerce, said: “The MPC made the right decision to keep interest rates and quantitative easing on hold.

“The UK’s economic recovery remains on track but is still facing challenges and this is not the time to put it at risk with premature rate increases. The current calls for higher rates, particularly while wage pressures are still weak, are unjustified.”

Rates have been left at the historic low of 0.5 per cent since the height of the financial crisis in 2009 to try to nurse the economy back to health. But the accelerating recovery has spurred pressure to lift the cost of borrowing back to a more normal level.

Next week sees the Bank’s quarterly inflation report when policymakers will present the City with their outlook for the economy – which will be seized upon for clues about when the rate rise will come.

INTEREST Rate setters had been urged to sit on their hands by Yorkshire business leaders. The Shadow Monetary Policy Committee voted unanimously earlier in the week for the Bank of England to hold the base rate at its historic low of 0.5 per cent and to leave its quantitative easing programme unchanged.

The Shadow MPC is a partnership between The Yorkshire Post and law firm Lupton Fawcett Denison Till.

There was agreement around the table that there are huge political sensitivities around any rise in interest rates.

Natalie Sykes, regional chairman of the Institute of Directors, said: “You may have young families who need to get onto the next step of the property ladder and can’t, and then you have inflation. It’s going to be quite damaging, so I can’t see it until next year.”

Andrew MacHutchon, of the Federation of Small Businesses, said: “I think the Government’s going to have to play very clever here in terms of timing for this. We might get something in the autumn in the way of an increase. I think they are going to have to be very clever how they pitch it.”

And while the committee acknowledged growing confidence in the strength of the economy they stressed that there remained threats to the recovery.

Alex McWhirter, chief executive of Finance Yorkshire, said: “The important term is ‘relative’. I don’t think it’s by any account a nailed on certainty.

“There are a lot of political issues in the next 12 months, there is instability in Europe and the world generally.”

Businessman David Bagley, of GDBA Pension Fund, added: “They are talking about three per cent growth as the annual growth rate and if that proves to be the case then that’s pretty good because it’s been a while since we have seen that. “Overall, things look great and when you look at unemployment it’s starting to happen but there are a lot of people who are self employed, they can’t find a job so they are working part time or they are doing their own thing and I think that’s masking a lot of unemployment.”