Interest Rates Held Again As Bank Of England Slashes Growth Outlook

Interest Rates Held Again As Bank Of England Slashes Growth Outlook

The Bank of England has slashed its UK growth outlook and kept interest rates on hold once more as darkening gloom over the global economy pushed further back the prospect of a hike.

All nine members of the Monetary Policy Committee (MPC) voted to keep rates on hold at 0.5%, where they have been since March 2009, in what marked the first unanimous vote since last July.

In minutes of its latest rates decision, the MPC said it was "more likely than not" that the base rate would need to increase within two years.

But its quarterly inflation report signalled a rate rise may now not come until the final quarter of 2017, with inflation set to remain low "for much of this year" and the worldwide economy weakening.

This is good news for borrowers, but will further disappoint savers who have seen rates remain at rock bottom levels for nearly seven years.

The Bank cut its forecast for growth in the UK economy for the next three years, to 2.2% in 2016, 2.4% in 2017 and 2.5% in 2018.

This is down from predictions for growth of 2.5%, 2.7% and 2.6% respectively in its November report.

It said the quarterly growth rate was likely to remain at current levels until the summer.

Official figures last week showed output edging up to 0.5% in the fourth quarter of 2015 from 0.4% in the previous three months, but falling to 2.2% overall for 2015 from 2.9% in 2014.

Its latest forecasts come against a backdrop of slowing growth worldwide and plunging oil prices, which have fallen by more than 70% since a peak in the summer of 2014.

The MPC said: "Global growth has fallen back further over the past three months, as emerging economies have generally continued to slow and as the US economy has grown by less than expected."

But it added that lower oil prices were providing a boost to the UK and advanced economies.

"Growth in the UK's main trading partners should continue to be supported by the boost to real incomes and low commodity prices," according to the MPC minutes.

The minutes showed that MPC member Ian McCafferty voted to hold rates in a U-turn on his recent calls for a rise to 0.75%.

He had voted for a rise since last August, but the minutes showed his change in stance came as he felt the "more prolonged period of low inflation suggested that the pick-up in the pace of wage growth would be initially more muted than previously expected."

Growth in wages has slowed recently, with the Bank's report suggesting employers were under less pressure to increase pay due to ultra low inflation and cheaper oil and energy prices.

The Bank is forecasting inflation to edge up to 0.5% in the first quarter of this year, from 0.2% in December.

But it added that low oil prices would likely keep it below 1% for the rest of the year, with energy bill cuts also bringing down the cost of living.

The Bank expects the remaining three major energy suppliers who have not yet reduced tariffs to do so during the spring, with further "significant rounds" of price cuts due this autumn and in 2017.

Meanwhile, the Bank published the latest letter from governor Mark Carney to the Chancellor George Osborne explaining why inflation is more than 1% off its 2% target.

In it, Mr Carney said: "By far the most important reason for below-target inflation remains the sharp falls in energy prices."

He added that he was likely to write further letters in the coming months, but saw inflation returning to target in around two years' time.


What's Hot