LONDON – The Bank of England has kept its main interest rate unchanged at the record low of 0.5 per cent and provided no indication that it’s in a hurry to start raising borrowing rates, to the likely relief of homeowners and businesses.
In minutes accompanying Thursday’s decision, the central bank said only one member of its nine-strong rate-setting panel voted for a quarter point increase in the benchmark rate. Like last month, Ian McCafferty was the only member of the Monetary Policy Committee, or MPC, to back an increase.
The decision and the makeup of the vote was the consensus view in the markets and the pound was left largely unmoved around $1.5415.
The Bank of England is widely expected to join the Federal Reserve in raising interest rates sometime in the coming months given the relative strength of the British economy and a steady decline in unemployment.
However, the prospect of a rate hike this year appears to have diminished in the past few weeks following the turmoil in global financial markets and low inflation rates.
In its statement, the rate-setting panel said the turmoil stoked by uncertainty over the Chinese economy has “the potential to add to the global headwinds to U.K. growth and inflation.” These developments merit “close monitoring,” it added.
Still, it said these have to be “weighed against the prospects for a continued healthy domestic expansion” that it says is underpinned by rises in income, supportive credit conditions and high economic confidence.
Britain is one of the fastest-growing among the world’s top industrial countries, notching up a quarterly growth rate of 0.7 per cent in the second quarter.
The Bank of England’s mandate is to meet a 2 per cent annual inflation target in a way that helps to sustain growth and employment. At last count, inflation was just 0.1 per cent in the year to July.
In the statement, the committee said there is a range of views among the nine members about the outlook for inflation. McCafferty justified his vote for a rate rise by noting that costs for businesses are rising, which could lead to inflation overshooting the target in the medium term.
In conclusion, the committee said that all members agree that, “given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.”
It stressed that this guidance “is an expectation, not a promise” and that the actual interest rate path will depend on economic circumstances.
“It is global conditions which are concerning policymakers and tipping the scales in favour of inaction,” said Ben Brettell, senior economist at Hargreaves Lansdown.
The Bank of England’s main interest rate has not been changed since March, 2009. It’s at its lowest level since the bank was created in 1694.