The Bank of England has kept interest rates on hold but signalled it was moving closer to a rate rise. The FT's Gemma Tetlow explains the decision and what it tells us about the state of the UK economy.
Produced by Vanessa Kortekaas. Filmed by Rod Fitzgerald. Images by Reuters and Getty.
Bank of England's monetary policy committee voted by seven to two to keep interest rates on hold at the historic low of 0.25%. They also made no changes to their asset purchase programme. But they gave the strongest hint for a long time that they are minded to raise interest rates in the coming months.
The MPC's comments that rate rises are likely to be needed in the coming months, if the economy evolves as they are predicting at the moment, gave the strongest stay yet that we could well see an interest rate rise at their second November meeting. Up until now, the Bank of England have struggled to signal to markets that actually they need to expect interest rate rises more quickly. The markets had been pricing and interest rate rises happening for the first time towards the end of next year and those expectations have now shifted quite a bit in light of the Bank of England's new comments.
The statement by the members of the Monetary Policy Committee and the split rate decision really highlight the difficulties in understanding what's going on in the UK economy at the moment. On the one hand, inflation is well above the Bank of England's 2% target and unemployment is below the level that the BOE think is consistent with sustainable growth in the UK economy. And both of those would point to raising interest rates now.
On the other hand, there's little evidence of growing pressure on wages. Wage growth continues to be quite subdued and well below inflation, which suggests there may still be slack in the UK economy. And the level of growth we've seen for the last six months is below what we've been used to in the UK in the past.
However, it's important to note one comment that the BOE have been trying to hammer home to people, which is that it looks like the potential growth for the UK economy and future is going to be weaker than it has been in the past. So we may need to get used to a new normal and accept the fact that interest rates may have to rise, even when we have growth at levels that, in the past, would have been considered unusually weak.