UK interest rates still at record low

On Thursday, only one member of the Monetary Policy Committee, a BoE panel which determines the setting of rates, voted to increase interest rates to 0.75%.

The bank’s Monetary Policy Committee (MPC) voted 8-1 to leave interest rates on hold.

It was the first time that the central bank has published minutes immediately after the meeting in a switch made by BoE governor and Canadian national Mark Carney that is aimed at providing more transparency.

The Bank continues to see inflation reaching its 2% target over the next couple of years though in the near-term it will be lower than it has previously thought.

“The most striking development in the UK over the past year has been the fall in CPI inflation, which edged back down to zero percent in June”, Carney said at his news conference.

It also forecast a slow pick-up in inflation thanks to a strong pound.

The BoE raised its forecast for British economic growth this year to 2.8 percent from a previous estimate of 2.5 percent.

Jane Foley, senior currency strategist at Rabobank, said: “While the MPC will lay the foundation for an future interest rate hike, it is still likely to be some months before a the majority of MPC members vote in favour of a rate hike”.

The Bank of England warned it was “possible that mortgage rates would shortly begin to rise”.

When Carney took over two years ago, he endeavored to make the bank’s decisions more clear with a “forward guidance” policy that was meant to telegraph the thinking of those who set interest rates.

“To the extent that the appreciation of sterling could be expected to weigh on inflation for a persistent period, the corresponding pickup in domestic costs necessary to return inflation to the target within three years would be greater”.

Carney said on July 16 that the decision about when to start raising rates “will likely come into sharper relief around the turn of this year”.

In recent weeks, traders have become increasingly bullish about the timing of an increase in the bank’s 0.5 per cent main rate, with forward contracts based on the Sterling Overnight Index Average (Sonia) implying a move next May.

“We have given what we expect will have to be the broad shape of the path of interest rates over the next two to three years and we ” ve said for good underlying economic reasons it’s going to be shallower than usual. However, with the economy now recovering strongly and wages finally rising quickly, speculation is growing about when it might decide to start weaning Britain off low rates.