The latest minutes from the Monetary Policy Committee reiterate the message that when the UK Bank Rate does rise it will be a slow process to ensure the recovery is not nipped in the bud.
This means, said the MPC, that the Bank Rate is expected to stay below the long term average for ‘some time to come’ and that the actual path it took would be uncertain over the coming years.
But the MPC did go on to say, “The Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise”.
As expected, for the moment the committee voted unanimously to maintain the Bank Rate at its record low of 0.5 percent and to maintain the level of stock purchased assets financed by the issuance of central bank reserves at £375 billion.
Commenting the Institute of Directors’ Chief Economist, James Sproule, said:
“Now, more than ever, is the time to start normalising interest rates. Extraordinary low interest rates were justified when our economy was in the doldrums. Now that is no longer the case, the Bank of England needs to reassess its policy. With the UK leading the G7 in terms of growth, and unemployment low and wages rising at their fastest rate since before the crash, our economy is well-placed to start bringing interest rates back to a more normal level.
“Inflation may be hovering around zero, but for monetary policy to be effective, interest rates need to be at a level where they can, if needed, stimulate the economy. Quantitative Easing should not be seen as a substitute for a long term policy on interest rates.
“The longer interest rates languish at a historic low, the harder it will be for Mark Carney to raise them ‘slowly and gradually’. The earlier the process of normalising rates starts, the smoother the course will be, and the longer the economy will have to adjust and prepare. If rates do not begin to return to a more sustainable level soon, the Bank of England will be defenceless when the next crisis strikes, and unable to support the economy by shifts in monetary policy.”
Martin Beck, senior economic advisor to the EY ITEM Club, comments:
“A subtle change of wording in July’s MPC meeting minutes suggested that the Committee has become more hawkish, echoing the sentiments expressed in a number of speeches over recent weeks.
“Given that the majority of the MPC’s members were quoted as believing that the current monetary stance was ‘appropriate’ even before the more uncertain external environment was considered, there is no suggestion that a rate hike is imminent. However, it does appear that the more hawkish camp has expanded to include more than two members, increasing the chances that the recent unanimity will break at the August meeting.
“But a majority voting in favour of a rate hike still looks a long way off. Recent falls in the price of oil and energy could contribute to inflation falling into negative territory in the next few months. Moreover, were the UK to be the first major economy to undertake rate ‘lift-off’, the already sizeable upward pressure on sterling could accelerate significantly, hitting exporters and undermining the prospect of inflation returning to the 2% target.”
Commenting, IPSE Economist Lorence Nye, said:
“The MPC was right to maintain interest rates at their record low. Self-employed people across the UK are facing rising costs and now is not the time to increase them further. By holding interest rates 0.5 per cent, the Bank of England’s monetary policy is stimulating economic conditions that support business confidence in the UK. “The Bank of England shouldn’t consider raising interest rates until we see continued strong economic growth, low unemployment and on target inflation. Recent evidence makes it clear that we are not at that point yet. The UK’s labour market recovery appears to have hit a bump in the road and inflation remains near zero. This must change before the Monetary Policy Committee agrees to even a modest increase.”