Bank Rate, at 0.5pc for more than six years, looks set to remain fixed until well into 2016, according to markets. It could be far longer, as we explain below.
Take a look at the Bank of England channel for in-depth coverage of the Bank’s latest views on the economy. Below we boil it down to the predictions and explain what it all means for savings and mortgages.
In July, markets believed a rate rise would happen within six months. But then the Black Monday crash in August undermined confidence. This was followed by the decision in late September not to increase rates in the US.
The UK economy is also looking less rosy than a money ago. Consumer confidence has fallen, unemployment has risen and the latest figures show slowing GDP. Deflation is also likely to return again in coming months. The counter to all of this is that pay settlements are on the rise. The monetary policy committee voted 8-1 to keep rates on hold at the October meeting (8 Oct).
Vicky Redwood of Capital Economics said: “The MPC’s decision to keep interest rates unchanged would have been an easy one given the recent softening in both domestic and global economic news. While financial markets have probably gone too far in pushing back expectations of the first rate hike until the start of next year (see the chart below), they have the gist of it right: the MPC is in no rush to raise rates.
“There are good reasons for the majority of the committee to vote to keep rates on hold until well into next year. For a start, the next set of inflation figures (of which the MPC will have seen a preview) should show that inflation dropped back into negative territory in September. While this deflation should only last a couple of months, the MPC will want to be sure that no second-round effects on inflation expectations are taking hold before tightening policy. And further ahead, a pick-up in productivity growth should keep unit wage costs and inflation under control.
“Meanwhile, the US Fed is not now expected to raise interest rates until next year – and we have explained before why there across the Atlantic… Finally, the minutes showed that some members ‘noted recent evidence that lags in the response of inflation to interest rate changes appeared a bit shorter than previously thought’.”
“This might indicate that rates can be left on hold a bit longer than they might have been in the past. Overall, a rate rise before the second quarter still seems unlikely in our view and, while not our central forecast, it is easy to imagine rates not rising until the second half of next year.”
It should also be noted that Bank of England chief economist Andy Haldane, arch dove of the monetary policy committee, last month said the case for UK raising interest rates is “some way from being made” and that negative rates may still be needed.