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Tags: Bank of England | Rates | Economy | Recovery

Bank of England Holds Rates Despite Unflagging Recovery

Thursday, 04 September 2014 07:21 AM EDT

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 percent, 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 favor 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.

With economic growth set to reach more than 3 percent this year, economists polled by Reuters expect the BoE to raise interest rates in early 2015 — probably a few months before the U.S. 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 on Sept. 18 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 eurozone economy, Britain's biggest export market, is another cloud on the horizon for the BoE.

The European Central Bank faces market pressure to take policy action to arrest an alarming decline in inflation. It announces its monthly policy decision later Thursday.

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 program at 375 billion pounds, and would reinvest 14.4 billion pounds of a gilt maturing this month.

© 2024 Thomson/Reuters. All rights reserved.

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.
Bank of England, Rates, Economy, Recovery
Thursday, 04 September 2014 07:21 AM
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