Bank of England slow to raise interest rates

The Bank of England kept interest rates steady at a record low 0.5% yesterday, judging that the outlook for prices and wages is still too weak for it to raise the cost of borrowing despite solid growth prospects.

The bank issued no statement but governor Mark Carney will explain more tomorrow, when he presents a quarterly update to the central bank’s forecasts for growth and inflation.

Most economists do not expect the bank to raise interest rates which have been unchanged for more than six years until early 2016. None of those polled by Reuters last week expected the bank to raise rates this month.

The US Federal Reserve is expected to start raising rates this year, followed by the Bank, while the European Central Bank is further behind as it is in the early stages of a major stimulus programme to revive the eurozone economy.

Analysts are waiting to find out when the bank expects inflation to return to its 2% target after slumping to a record-low zero percent in February and March due to a tumble in global oil prices.

The bank delayed its interest rate decision from last week to avoid clashing with a national election which unexpectedly saw Prime Minister David Cameron’s Conservative Party return to power with an outright majority.

Economists say the election result is likely to reinforce the bank’s view that there is no need for interest rates to rise soon as Cameron’s government will continue to tighten fiscal policy with the aim of eliminating its budget deficit by 2019.

In February the bank forecast it would take around two years for inflation to return to target, while growth would continue at an above-average pace of just under 3%, as the country makes up ground lost during the financial crisis.

Since then, growth in the first three months of this year has come in weaker than the bank expected at 0.3%. Economists think the bank may have to nudge down its growth forecasts on tomorrow.

However, last month the central bank also noted that markets had priced in only a very slow pace of rate rises — something which may push up the inflation forecast derived from the bank’s economic models.

Carney may address market expectations on interest rates when he speaks tomorrow morning.

In April, markets were pricing in no rate move until September 2016 and for rates to rise slowly after that. Now, markets expect a rise in around a year.

Markets have been repeatedly wrong-footed on rates by the bank.

Almost a year ago, it warned that they were underestimating the chance of a rate rise, causing a jump in sterling. Then oil prices tumbled, reducing pressure to fight off inflation.

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