There were many reasons deterring members from arguing for a rate hike.
Many of the panel are concerned about low inflation. The annual rate of inflation is currently zero per cent, around which it has hovered since February. It is solidly below the Bank of England’s two per cent target.
Productivity is also beginning to recover, which implies inflation could be slow to pick up in future.
Sterling strength is also a worry. The pound bought €1.24 at the start of the year, it now buys €1.43. This 16 per cent appreciation makes UK-produced goods and services more expensive to people whose earnings are in euros.
This has made business very difficult for the many firms, especially manufacturers, that export to the Eurozone.
The rise in the value of the pound has also made it cheaper to import many goods, allowing savings to be passed on to consumers, weighing further on inflation.
Others said that the Bank should wait until the US central bank, the Federal Reserve, raises interest rates before deciding to do so. Doing otherwise could come as a shock to markets. Ross Walker and Vicky Pryce both questioned the underlying strength of the UK’s economic growth.
However, Simon Ward believes it would be better to start incremental increases now, so that the pace of rate rises can be kept gradual. Otherwise the Bank may have to lift rates quickly later on if it is aiming to have them at 2.5 per cent in two years time.
The Bank has held its headline interest rate at a record low of 0.5 per cent since the March 2009.
It will announce the latest decision of its nine-strong monetary policy committee today at 12pm.
CITY A.M.’S SHADOW MONETARY POLICY COMMITTEE
OUR PANEL’S GUEST CHAIR FOR THIS MONTH: JOHN LONGWORTH | BRITISH CHAMBERS OF COMMERCE
No change. Businesses see no convincing argument to raise interest rates at the moment. Indeed, doing so would be rash, premature and could potentially stifle growth. The recovery is still in early days, export growth has stalled, sterling is strong and moves that strengthen it further would hit our manufacturers, there is great global uncertainty, and, at home, the government is embarking on the next round of cuts.
No change. Raise rates in a gradual, incremental fashion after the Federal Reserve raises. This is the sensible path as the UK and US strengthen relative to the global economy.
No change. It is becoming a closer call on whether to raise rates. Growth has returned, inflation is expected to rise later in the year and policy is exceptionally loose. It is only a matter of time before rates will be needed to be raised, albeit gradually.
No change. A hike ahead of the Fed would be unnecessary and a potential shock to markets. But the MPC should prepare the public for a first hike in February 2016 or November 2015. The British labour market is strong enough for that.
No change. The UK’s recovery may be back on track, but price pressures are still extremely weak. Productivity growth has strengthened, too, so the recent pick-up in wage growth should not panic the MPC.
Raise. The MPC’s forecasts imply that rates should be back at a “neutral” level in two years’ time, if not before. Even on the dubious view that neutral is only about 2.5 per cent, the rise must start now if it is to be kept “gradual”.
BIS AND CEBR ADVISER
No change. The pound’s strength is inhibiting manufacturing and exports while keeping inflation low and the recent rise in unemployment is raising questions as to the true underlying growth rate of the economy.
No change. Price inflation is hovering around zero and global uncertainties are a medium-term risk to the recovery. That said, as the economy is expanding healthily, a split vote on the MPC would not come as a surprise.
No change. Economic growth, excluding North Sea oil & gas extraction, has run at sub-trend rates throughout 2015 so it is hard to argue the amount of spare capacity has diminished this year or that the need for a rate hike has become more pressing.