Bank of England holds interest rates at 0.5%

The Bank of England’s Monetary Policy Committee (MPC) voted to keep the base interest rate and the stock of assets purchased under the quantitative easing programme unchanged in February at 0.5% and £375 billion respectively.

The headline rate of inflation, as measured by the Consumer Price Index (CPI), fell to just 0.5% in December and, according to figures from the British Retail Consortium (BRC), food prices plunged at the quickest rate in eight years in January as the supermarket price war continued. This, combined with further falls in the price of vehicle fuels, is likely to move consumer price inflation to a new record low in January, edging the UK economy closer to deflation, according to the UK’s Centre for Economics and Business Research (Cebr), which expects a brief bout of negative inflation to begin in March.

Fortunately for the UK economy it looks unlikely, at present, that weak or negative inflation will become entrenched, said Cebr.

Lower oil prices should act to stimulate growth in the UK economy in 2015. Weak inflation and a pickup in wage growth will support a substantial and sustained increase in real wages over the course of this year. This will act to bolster household spending power and boost consumption. This demand should place upward pressure on prices, helping to move the headline rate of inflation back towards the Bank’s 2% target in 2016 as the short-term effects of lower oil prices pass through. However, with the European Central Bank further easing monetary policy by announcing its own quantitative easing programme in January, an early rate rise risks importing further disinflationary pressure to the UK as the value of the pound strengthens. In such a situation the UK’s brief bout of deflation could become a rather more drawn out process. Indeed a number of other central banks have responded by easing monetary policy themselves to combat such pressures. As such it looks increasingly unlikely the Bank of England will raise the base rate in 2015,” the economic forecaster said.

Cebr now expects the MPC to start raising interest rates from February 2016