Bank of England holds interest rates at 0.5 per cent as inflation forecasts are pushed back

Chris Papadopoullos
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Rates have been at 0.5 per cent since March 2009 (Source: Getty)

Rate-setter Ian McCafferty failed to persuade any of his colleagues to join him in voting to lift official interest rates from their record lows this month as the Bank of England’s monetary policy committee (MPC) pushed back its inflation forecast.

The MPC – which voted eight to one to hold rates - changed its tone on inflation, saying it now believed inflation will only surpass one per cent in the spring. In last month’s minutes they expected inflation to creep past one per cent around the turn of the year.

Inflation, as measured by the annual change in the consumer price index (CPI), was zero per cent in August.

This was due to the continuing falls in oil prices and the strength of the pound.

“It seemed likely that the past appreciation of sterling would continue to exert downward pressure on CPI inflation for a period and threat domestic cost pressures would need to be commensurately stronger in order to return inflation sustainably to the two per cent target,” the minutes of the MPC’s meeting said.

The MPC also said there was evidence of additional spare capacity in the economy, implying the economy had more room to expand before inflation picked up.

However, the majority of the MPC believes the current stance of policy is appropriate for achieving the two per cent inflation target within two years.

McCafferty believes it risks overshooting, and that a small rate rise now will mean the committee can hike more gradually in future.

Growth in emerging markets was still a concern but the focus turned away from China.

Despite volatility in risky asset prices, Chinese economic data had been steady and the authorities had implemented a range of stimulatory policies, the committee said. However, the MPC is now more concerned over growth in Brazil and Russia, with the impact of an emerging market slowdown on the UK economy still unclear.

“Key questions were how pronounced the on-going swing in the emerging market economies would turn out to be and to what extent this would spill over to activity in the advanced economies,” the minutes said.

The Bank of England’s base rate has been held at 0.5 per cent since March 2009.

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