Bank of England holds rates at 0.75%

Bank of England holds rates at 0.75%

The Bank of England’s Monetary Policy Committee (MPC) has voted unanimously to keep interest rates unchanged at 0.75 per cent.

Markets were pricing in a more than 75 per cent chance of interest rates being cut this month, and three of the nine members of the committee which sets interest rates made speeches in early January anticipating that the time may be at hand to drop rates.

But stronger than expected economic data at the end of January, specifically the composite purchasing managers index (PMI) data, which showed growth at a 16 month high, dampened the chances.

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The central bank officials also agreed to maintain the current bond buying programme. This involves buying bonds in the open market, forcing down the yields, thus discouraging investors from parking their cash in lower risk assets and instead to deploy it to higher risk assets, which are more likely to stimulate economic growth. 

In the aftermath of the decision, sterling spiked against the dollar, rising to £1.305. 

However, the central bankers presented a very negative outlook for the economy. Their view is that the UK's trend growth rate this year is 1.1 per cent. Any growth above this level would stoke inflation in the economy. 

If the UK economy grew at this rate, it would be the slowest level since the second world war, and almost half the 2 per cent which the Bank of England regards as the long-term average growth rate the UK should expect to achieve without inflation becoming a problem. 

Bank of England chief economist Andy Haldane previously stated that as a result of the UK leaving the EU, the trend growth rate over the long-term would likely fall from 2 per cent to 1.5 per cent. 

This was the last meeting with Mark Carney in the chair, the next one will be chaired by the new governor of the Bank of England,  Andrew Bailey, who takes the helm in March. 

Frances Haque, chief UK economist at Santander, said: “The MPC’s decision to leave bank rate unchanged was a tight call, particularly given comments made in recent weeks by members.

"All eyes were on the economic data published last week, with January flash PMIs leading to stronger growth than expected with increases across both manufacturing and services.

"This, along with positive labour market data and buoyant survey data from RICS, Deloitte and CBI will all have helped to stay the hand of the MPC, at least for now until more economic data for the beginning of the year emerges.

"We now wait to see whether the bounce in confidence from the general election continues to feed through to growth at the start of 2020.”

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