Bank of England holds rates despite robust recovery

The Bank of England kept interest rates on hold on Thursday as Britain’s economy continued to thrive, although risks to the recovery both at home and abroad remain.

The BoE's Monetary Policy Committee (MPC) left its Bank Rate at 0.5 per cent, where it has been since the depths of the financial crisis more than five years ago.

Investors will have to wait almost two weeks to find out if any more policymakers voted in favour of raising interest rates, after two of the nine MPC members broke ranks in August.

The BoE last month said it was watching for signs of pay growth, which has been very weak, as it considers the best time to start weaning the economy off low rates.

Sterling fell slightly after the BoE decision, hitting a new seven-month low against the dollar, while British government bond futures also fell modestly - suggesting at least some investors are starting to bet on an early rate hike.

With economic growth set to reach more than 3 per cent this year, economists expect the BoE to raise interest rates in early 2015 - probably a few months before the US Federal Reserve.

But there are risks to that view, both from home and abroad.

Activity in the services sector that dominates Britain’s economy grew at the fastest pace in a year in August, a survey showed this week, suggesting no let-up in the pace of economic recovery going into the final months of the year.

But waning growth in manufacturing added to a sense that the recovery - while strong - is still too reliant on Britain’s big-spending consumers rather than business investment or exports.

Scotland’s independence referendum this month could deliver the most immediate shock to the economy - a poll this week showed support for independence at its highest ever level, putting the outcome of the vote in doubt.

Goldman Sachs said on Wednesday that a vote for independence would have “serious consequences” for both the Scottish and UK economies, as the pound hit a new seven-month low against the dollar.

A stagnant euro zone economy, Britain’s biggest export market, is another cloud on the horizon for the BoE.

Business surveys have also suggested the conflict in Ukraine has impacted trade in Europe. Any further escalation could have a tangible impact on economies across Europe, and therefore further delay the BoE’s exit from record low rates.

Further ahead, economists believe a British national election in May next year could influence the timing of a rate hike, even though MPC members are independent of political considerations.

With politicians at odds over whether the current government should be credited with economic recovery or blamed for a painful decline in living standards, the first interest rate hike since 2007 will be in focus in a likely close election race.

The BoE said on Thursday it was keeping its stock of assets amassed under its quantitative easing programme at £375 billion, and would reinvest £14.4 billion of a gilt maturing this month.

Reuters