Financial News

  • 6 September 2013, 14:24

BoE Holds Interest Rate At Record 0.5% Low

The UK interest rate will remain unchanged in September, the Bank of England has said, but analysts believe signs the economy is improving could see the cost of borrowing rise sooner than previously thought.

Bank of England governor Mark Carney had pledged to leave the interest rate at its current record low level of 0.5% until the unemployment rate falls to 7%, which it expects to happen in 2016.

The forward guidance policy was brought in an attempt to stimulate growth.

But it has so far failed to have the desired effect on the City, with a series of caveats to the announcement last month prompting market expectations to be brought forward rather than pushed back.

A raft of exceptionally strong sector surveys this week has added to fears that rates may rise sooner than the 2016 date suggested by the Bank.

James Knightley, economist at ING Bank, said with the housing market potentially heading for another boom and inflation already well above the 2% target, one or more of the Bank's so-called knockouts could be triggered.

"As such, markets - ourselves included - suspect that the first rate hike is more likely to come in early to mid 2015," he said.

But some experts gave Mr Carney and his forward guidance strategy a vote of confidence.

Alan Clarke, a director at Scotiabank, said: "The Bank is not going to be whipped around by short-term swings in the market - higher market interest rates are probably an irritation, but not a game changer at this point."

"Based on the fact that the vast majority of economists still expect unchanged rates for around two years, forward guidance has been a runaway success."

The Bank also made no change to its recent asset purchase programme under which the Bank has spent 375bn on British government bonds.

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