Bank of England sticks with low rates even as recovery builds

LONDON Thu May 8, 2014 8:27am EDT

Pedestrians walk past the Bank of England in the City of London January 28, 2014. REUTERS/Paul Hackett

Pedestrians walk past the Bank of England in the City of London January 28, 2014.

Credit: Reuters/Paul Hackett

LONDON (Reuters) - The Bank of England kept interest rates at a record low on Thursday but the strong pace of Britain's economic recovery and a surge in house prices is likely to lead to a split among policymakers soon.

As expected, the Bank's Monetary Policy Committee left its benchmark interest rate at 0.5 percent where it has sat since the depths of the financial crisis more than five years ago.

The MPC made no statement and a breakdown of how its nine members voted is only due on May 21.

Disagreement over when the bank should raise rates may already be brewing, economists said, as output looks set to expand by about 3 percent this year and concerns are growing about a possible housing bubble.

"Against this background, it would not be a total shock if some Committee members have started seriously to consider a tightening of policy, if not actually voting for one," said Jonathan Loynes, chief European economist at Capital Economics.

If the BoE does raise rates within the next 12 months, as many economists expect, it would likely make Britain the largest advanced economy to tighten policy since the financial crisis, as no move seems close in the United States, euro zone or Japan.

Of the nine MPC members, Martin Weale has sounded most concerned about the risk of inflation picking up, even though it recently touched a four-year low.

Complicating the picture is a reshuffle at the BoE which means three new rate-setters will join the MPC in the coming months, starting with Andy Haldane. He is currently in charge of looking for risks to the economy from the banking sector, and is due to swap roles with chief economist Spencer Dale in June.

The BoE is due to announce a new set of quarterly economic forecasts at 5:30 am (0930 GMT) next Wednesday when Governor Mark Carney will hold a news conference.

Investors will be watching for its latest assessment of how quickly the spare capacity in the economy is being run down, something which could push up inflation.

Simon Wells, an economist at HSBC, said a big question was whether the bank would show any concerns about the apparent lack of growth in British productivity, something it had been counting on once demand started to bounce back.

"Recall that the MPC expect a cyclical recovery in productivity, which is a key reason it feels comfortable keeping rates on hold," he said.

NEW GUIDANCE

This week's MPC meeting was the first since British unemployment fell below the 7 percent level Carney set last August as a threshold for considering a rate hike. In February, as unemployment fell much faster than the BoE had expected, the bank linked its thinking on rates to spare capacity.

Investors, betting on an earlier move by the BoE than it has so far signaled, pushed the pound up to its highest level against the dollar in nearly five years this week. Sterling was little changed by the BoE announcement on Thursday.

Markets have largely priced in a first rate hike in the first quarter of 2015. The BoE hinted in February that the second quarter of next year was the most likely timeframe. Since then growth data has come in stronger than expected, although inflation has fallen to well below the bank's 2 percent target.

Adding to pressure on the BoE over interest rates is the surge in British house prices.

Data on Thursday provided the latest signs that the market has lost a bit of its heat recently. Nonetheless, an 8.5 percent annual rise in house prices underscored its strength.

The BoE has stressed it will take measures to control credit as a first line of defense against the risk of a housing bubble, rather than raise interest rates. The bank's Financial Policy Committee is due to meet on June 17.

(Editing by Mark Trevelyan)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.