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August 7, 2014 12:00 pm
The Bank of England has left interest rates at their historic low of 0.5 per cent and will maintain its stock of gilts for a further month, it announced on Thursday. The BoE holds £375bn of gilts under its quantitative easing programme and has said it will not begin to unwind them until interest rates rise.
The main bank rate has been 0.5 per cent since March 2009. But with the economy growing and unemployment falling, there is increasing speculation that members of the rate-setting Monetary Policy Committee will start voting for a rise soon.
The minutes of the August meeting, which will be published in two weeks, will be closely studied to see if any members have moved on from the position last month that the decision to raise rates had become “more balanced”.
The last time there was a split vote on raising rates was July 2011, when two members voted for a quarter-point increase.
Rob Wood, chief UK economist at Berenberg bank, said the most important question this month was “not what the decision would be, but what is happening behind the scenes”.
This meeting was the first with all of the new members of the MPC, with deputy governor Minouche Shafik attending her first session.
The focus now turns to the publication next week of the BoE’s quarterly inflation report where the BoE will present its latest view of the economy.
City economists will be looking for indications of the bank’s latest thinking on weak wage growth in the face of strong rises in employment. Recent minutes have suggested the MPC is starting to place greater importance on this as an indicator of spare capacity in the economy.
Policy makers are monitoring the economy for signs that the room for non-inflationary growth is reducing and have indicated rates will rise before it is absorbed.
Victoria Clarke, economist at Investec, said that while “momentum is largely blowing in the direction of tighter policy, one change in the wind could come from pay growth”.
She added that if the BoE does confirm it is now placing more significance on wage trends, that would likely push back market expectations of the timetable for the first interest rate rise.
Speaking to business leaders in Glasgow recently, Mark Carney, BoE governor, said as the economy heads back to normal, interest rates would need to rise to ensure the bank hits its 2 per cent inflation target.
However, he also voiced concerns that interest rate rises could hit Britain’s fragile recovery if households cut spending in response.
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