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Bank of England holds base rate at 0.25%

Written by: Paloma Kubiak
The Bank of England’s Monetary Policy Committee (MPC) voted to hold the base rate at 0.25%, leading the pound to gain almost a cent against the dollar.

The MPC last night voted 7-2 to maintain the base rate at its record low of 0.25% following a “slightly stronger picture than anticipated” since its August outlook.

Members noted that GDP rose 0.3% in the second quarter, unemployment has continued to decline to 4.3% and there is continued strength in employment growth.

However the MPC did acknowledge that the headline and core CPI inflation was higher than anticipated at 2.9% and it is expected to rise above 3% in October, overshooting the 2% target for the next three years.

Minutes of the meeting stated: “A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.

“All members agree that any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”

It added: “The Committee will continue to monitor closely the incoming evidence and other developments, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”

The Committee voted unanimously to maintain its levels of government and corporate bond purchases at £435bn and £10bn respectively.

Maike Currie, investment director for personal investing at Fidelity International, said it came as little surprise that the MPC is still in no rush to raise rates from their historic lows.

“Last month, the committee’s message was that interest rates would probably have to rise, and by more than markets were pricing in. But there seems little urgency to tighten, at least outside the small group that favoured a hike. Currently, the economic data paints a mixed picture. While manufacturing numbers look stronger, construction figures have dipped. The jobs market continues to improve, but while unemployment is at a 42-year low, our pay packets are going nowhere.”

Ben Brettell, senior economist at Hargreaves Lansdown, said: “To me, leaving rates where they are makes a great deal of sense. Usually a combination of low unemployment and above-target inflation would mean a rate rise was firmly on the cards. But these are far from normal times. Unemployment might be at a multi-decade low, but this has yet to feed through into any meaningful wage growth. Meanwhile, inflation is expected to fall back without the need for action, as the effect of sterling weakness falls out of the year-on-year calculation.”

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