Bank of England holds benchmark interest rate at 0.5%

The Bank of England holds its benchmark interest rate at 0.5%, the lowest level in its 320-year history. Governor Mark Carney and colleagues at the Monetary Policy Committee (MPC) say they are alert for signs that British workers’ earnings are about to rise.

In a press release, the Bank of England (BoE) said the MPC voted to “maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion, and so to reinvest the £14.4 billion of cash flows associated with the redemption of the September 2014 gilt held in the Asset Purchase Facility.”

The British pound dropped slightly after the BoE announcement, reaching a 7-month low against the dollar. Government bond futures also declined marginally – suggesting that a number of investors are beginning to expect a rate hike sooner than later.

BoE likely first to raise rates

Among the ‘big four’ central banks, the BoE is in pole position to raise interest rates from the very low levels that have prevailed since 2008.

Investors and economists are betting on a benchmark rise either by the end of 2014 or very early in 2015, with the US Federal Reserve doing so a few months later.

In last month’s policy meeting, two MPC members (Martin Weale and Ian McCafferty) voted to raise interest rates – the first split within the UK central bank since the financial crisis hit. Their concern is that the GDP growth spurt is rapidly eliminating any slack that prevents inflation from shooting up.

UK economic indicators

A growing number of economists warn that the BoE is stoking inflation.

Today, however, it appears that MPC members are united in maintaining rates where they are for the moment, allowing the economy to grow a little longer. We won’t know how the MPC voted for another two weeks.

According to the IMF (International Monetary Fund), the British economy is the fastest-growing among the G7 nations. UK authorities have forecast 2014 GDP growth of 3.5%.

Annual inflation at 1.6% in July was well within the BoE’s target of 2%. If interest rates rise early next year, the central bank believes growth will hit target and inflation too in early 2015.

Unemployment and wages

In June, unemployment fell by 132,000 to 6.4%, the lowest level since 2008. However, wages only increased by (annually) 0.6%, the lowest level since 2009.

There is growing frustration in the country among workers, who say nobody is enjoying the benefits of economic growth. For several years pay increases have not kept up with inflation.

The BoE believes that for the moment, the mix of strong GDP growth, falling unemployment, rapidly rising house prices, below-target inflation and very low wage growth does not merit an interest rate hike – not just yet.