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Interest rates held at record 0.5% but growth forecast downgraded

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Written by: Paloma Kubiak
04/02/2016
Interest rates were again held at 0.5% which represents one step towards the near seven-year record lows, but one step back from the idea of a rate rise in the near future.

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain the base rate at 0.5% in a bid to meet the 2% inflation target to help sustain growth and employment.

It also downgraded the 2016 growth forecasts to 2.2% (down from the 2.5% forecast in November) and its 2017 forecast to 2.4% (down from 2.7% in November).

In an open letter Mark Carney, the Bank of England governor, explained the falls in commodity prices, the appreciation of sterling and the below-average growth of domestic wage costs have influenced the deviation of the inflation target.

The MPC expects inflation to return to the target in about two years’ time and Carney added: “The peak effect of monetary policy on inflation is generally estimated to occur with a lag of between 12 and 24 months. Moreover, attempts to return inflation to the target too quickly could lead to undesirable volatility in output.”

While the historically low interest rates mean homeowners have benefitted from competitive mortgages, increased consumer spending power and it has become cheaper to service debts, an expert warned people not to get too comfortable, despite the possibility of a decade of ultra-low interest rates.

‘An interest rate rise is like the pot of gold at the end of the rainbow’

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “An interest rate rise is like the pot of gold at the end of the rainbow, the nearer you get to it, the further away it moves. A rise in rates now looks firmly in the long grass. Markets are currently pricing in a rate rise in the middle of 2017, though they have been consistently premature in their forecasts, and reaching the dubious milestone of a decade of ultra-low interest rates is now a distinct possibility.

“Low interest rates have kept the wheels turning, albeit slowly, and many people are still enjoying low mortgage payments as a result of loose monetary policy. However the danger is the longer interest rates stay low, the more comfortable people get with higher levels of debt, and the more painful rate rises eventually prove to be.”

‘The bigger picture is that growth remains lacklustre, but reasonably resilient’

For Maike Currie, today’s ‘Super Thursday’ reports – where the BOE declares its hand on interest rates, releases the latest MPC minutes and the latest inflation information – makes for “relatively gloomy reading”.

Currie said: “The bigger picture is that growth remains lacklustre, but reasonably resilient. A slowdown in emerging markets combined with increased uncertainty in global financial markets was bound to weigh on growth forecasts, but the domestic economy remains in reasonable health despite these headwinds.

“Looking forward, the low oil price should continue to aid the domestic consumer, but neither wage growth nor inflation look anywhere near strong enough for the BOE to consider higher interest rates this year. The Bank is now basing its own forecasts on market expectations of the first rise in mid-2017.”

‘Clearly shows the Bank is worried over the prospects of UK growth’

Helal Miah, an investment research analyst at The Share Centre, said today’s report clearly shows the Bank is worried over the prospects of UK growth and the market has now pushed back the date when it thinks the MPC will raise rates to mid-2017.

Miah said: “Today’s statement is not good news for fixed income investors, and should reassure equity investors that the stock market still represents a good source of income while offering capital appreciation opportunities. However investors will need to be very selective in their stock picking in this environment.”

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