UK interest rates on hold at 0.5% for another month

August 11, 2014

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By Lucy Palmer-Richeson
August 11th 2014

The Bank of England (BoE) has held interest rates at 0.5% for another month, following a two-day meeting this week.The size of the Bank’s economic stimulus programme – quantitative easing – also remained unchanged at £375bn.

The main Bank Rate has remained at 0.5% since March 2009.

The decision to keep the rate at 0.5% has come as a surprise to some economists who expected that a few of the members of the Bank’s Monetary Policy Committee (MPC) would vote against consensus, especially with the decline in unemployment and the growth in UK economy.

However, policymakers have noted that whilst there is a marked increase in employment, wage growth remains weak. Figures this month showed that compared to the same period in 2013, average weekly pay (including bonuses) increased by only 0.3% to £478 in the three months to May.

This weakness has raised concerns that higher debt servicing costs following a Bank rate increase could weaken the UK’s current economic recovery.

Whilst an overall vote in favour of an interest rate hike would have also surprised economists, there is a popular view that there will be a hike in interest rates soon, possibly as early as the end of the year. However, David Kern, chief economist at the British Chambers of Commerce, warned that if there is a rise too soon, it could hurt economic growth.

“The current calls for higher rates, particularly while wage pressures are still weak, are unjustified,” he said.

“The rise in sterling over the past year has put pressure on UK exporters, and is equivalent to a tightening in monetary policy. This strengthens the case against premature interest rate rises.”

The details of why the rates were not increased, and whether there were any dissenters, will be released later this month, when the minutes of the meeting are publicized.

The Bank’s Governer Mark Carney has said that when rate raises do come, they will be gradual and limited.