UK interest rates stay at 5.25 per cent
Interest rates were left unchanged at 5.25 per cent on Thursday, but the City remains convinced that further increases in the cost of borrowing are just around the corner.
The Bank of England’s decision to stay its hand suggests that the majority on its monetary policy committee (MPC) were prepared to wait to see what effect the three 0.25 per cent percentage point increases since August will have on demand in coming months.
It also may point to a fall back in the consumer price index measure of inflation for January, on which the official report will have been given to the MPC prior to their vote.
The jump in CPI inflation to 3 per cent in December, a full 1 percentage point above the Bank’s 2 per cent target, is one of the main reasons for the rate increase in January.
A majority of economists had expected no change in monetary policy on Thursday, but markets were nervous after last month’s surprise quarter point hike.
A survey by Bloomberg showed only 8 out of 50, or 16 per cent, of analysts thought the monetary policy committee would vote to raise rates for the second consecutive month, to 5.5 per cent.
However, 43 per cent of respondents see interest rates at 5.5 per cent or higher by March, and this rises to 74 per cent for rates to be at that level or higher in May.
Investors’ attention will now turn to the publication on February 14 of the Bank of England’s latest quarterly inflation report for a guide to the Bank’s thinking. A week after that the minutes of Thursday’s MPC meeting will be released.
The minutes of the January meeting showed a committee more deeply split about whether to tighten monetary policy than had been expected.
However, for many in the 4 to 5 minority who wanted to keep rates unchanged, their decision was based on a matter of timing rather than direction.
Because of this, a tightening bias is likely to persist within the MPC. And recent data may have only marginally tempered this view.
Surveys of the service sector show continued robust, though slightly slower, growth, while manufacturers appear to be coping, so far, with the strong pound. Significantly, both sectors are showing evidence that companies are enjoying a bit more pricing power.
Retailers, in contrast, still need to offer discounts to entice buyers, but not to the same extent as in the recent past. Consumer spending also remains relatively robust, and a better than expected Christmas has not been followed by a weak new year according to industry data.
Anecdotal evidence of pay negotiations suggest workers are prepared to ask for inflation-beating wages in order to compensate for higher living costs, an area of particular concern for the MPC.
Finally, asset prices continue to rise. The Bank of England says it does not directly target asset prices, but it has made clear that they can add to inflationary pressures as households can feel wealthier and increase spending accordingly.
The Halifax said on Thursday that house prices are rising at an annual rate of 9.9 per cent - though it did warn that recent volatility in prices on a month-on-month basis suggested a cooling market. Weaker mortgage approvals data appear to support this view.
In addition, equities are at fresh six-year highs, buoyed by merger activity.
Though borrowers may have welcomed Thursday’s decision by the Bank, a respected economic think-tank will have been disappointed by the MPC’s reticence.
The National Institute of Economic and Social Research (Niesr) on Thursday called for “at least one further interest rate increase in order to keep inflationary pressures in check”.
Publishing its projection that the economy grew by 0.8 per cent in the three months ending in January, Niesr reiterated its belief that monetary policy should be used to influence expectations.
It went on to say: ”For this reason and bearing in mind the recent pattern of pay settlements, we think that the Bank of England should err on the side of caution and raise the interest rate again this month.”
Niesr may get its wish in March.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
The Bank of England’s decision to stay its hand suggests that the majority on its monetary policy committee (MPC) were prepared to wait to see what effect the three 0.25 per cent percentage point increases since August will have on demand in coming months.
It also may point to a fall back in the consumer price index measure of inflation for January, on which the official report will have been given to the MPC prior to their vote.
The jump in CPI inflation to 3 per cent in December, a full 1 percentage point above the Bank’s 2 per cent target, is one of the main reasons for the rate increase in January.
A majority of economists had expected no change in monetary policy on Thursday, but markets were nervous after last month’s surprise quarter point hike.
A survey by Bloomberg showed only 8 out of 50, or 16 per cent, of analysts thought the monetary policy committee would vote to raise rates for the second consecutive month, to 5.5 per cent.
However, 43 per cent of respondents see interest rates at 5.5 per cent or higher by March, and this rises to 74 per cent for rates to be at that level or higher in May.
Investors’ attention will now turn to the publication on February 14 of the Bank of England’s latest quarterly inflation report for a guide to the Bank’s thinking. A week after that the minutes of Thursday’s MPC meeting will be released.
The minutes of the January meeting showed a committee more deeply split about whether to tighten monetary policy than had been expected.
However, for many in the 4 to 5 minority who wanted to keep rates unchanged, their decision was based on a matter of timing rather than direction.
Because of this, a tightening bias is likely to persist within the MPC. And recent data may have only marginally tempered this view.
Surveys of the service sector show continued robust, though slightly slower, growth, while manufacturers appear to be coping, so far, with the strong pound. Significantly, both sectors are showing evidence that companies are enjoying a bit more pricing power.
Retailers, in contrast, still need to offer discounts to entice buyers, but not to the same extent as in the recent past. Consumer spending also remains relatively robust, and a better than expected Christmas has not been followed by a weak new year according to industry data.
Anecdotal evidence of pay negotiations suggest workers are prepared to ask for inflation-beating wages in order to compensate for higher living costs, an area of particular concern for the MPC.
Finally, asset prices continue to rise. The Bank of England says it does not directly target asset prices, but it has made clear that they can add to inflationary pressures as households can feel wealthier and increase spending accordingly.
The Halifax said on Thursday that house prices are rising at an annual rate of 9.9 per cent - though it did warn that recent volatility in prices on a month-on-month basis suggested a cooling market. Weaker mortgage approvals data appear to support this view.
In addition, equities are at fresh six-year highs, buoyed by merger activity.
Though borrowers may have welcomed Thursday’s decision by the Bank, a respected economic think-tank will have been disappointed by the MPC’s reticence.
The National Institute of Economic and Social Research (Niesr) on Thursday called for “at least one further interest rate increase in order to keep inflationary pressures in check”.
Publishing its projection that the economy grew by 0.8 per cent in the three months ending in January, Niesr reiterated its belief that monetary policy should be used to influence expectations.
It went on to say: ”For this reason and bearing in mind the recent pattern of pay settlements, we think that the Bank of England should err on the side of caution and raise the interest rate again this month.”
Niesr may get its wish in March.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Labels: 5.25%, Bank of England, interest rates, loans
posted by Wise Money @ 10:45 AM
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