Interest rate hold leavs MPC room to focus on growth - EY ITEM Club

6 March 2014

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  • Rates remain at 0.5% and will do for some time
  • The UK economy remains fragile and inflation remains in check
  • The minutes due later in March should clarify the Bank’s thought process

Andrew Goodwin senior economic adviser to the EY ITEM Club, comments on today’s MPC decision.

“Today’s decision by the MPC was the first under ‘phase two’ of forward guidance, which encompasses a broader range of parameters beyond unemployment. The decision to leave rates unchanged came as no surprise – while unemployment is falling and there are some signs of growth broadening into investment, we are yet to see an improvement in real wages. The UK economy remains fragile, and raising rates prematurely could put a stick in the spokes of the recovery. Meanwhile, inflation remains in check, leaving the MPC room to focus on supporting growth.

“We expect the Bank to remain cautious, only raising interest rates once the resilience of the recovery is assured. We expect this to occur in 2015 Q3. And while some commentators fear that low interest rates are inflating a housing bubble, these concerns are overblown. Moreover, interest rates would be a poor choice of instrument to guard against a house price bubble.

“The minutes due to be released later in March will clarify exactly how the Bank’s thought process has changed since the transition to phase two of forward guidance. The MPC members have all spoken with one voice over the past month, and we would hope that the next set of minutes would provide a window into any differences of opinion between them.