Export drag from strong pound keeps rate rise out of the question


Today the Monetary Policy Committee of the Bank of England voted to keep the base rate unchanged at 0.5%, as widely expected. The base rate has stood at this level for over six years now, and with inflation at its lowest level for fifty years rates are unlikely to rise before the end of 2015.

Currently there is nothing compelling the Bank to raise its base interest rate. Inflation on the latest reading dipped below zero to -0.1% in April. The Bank of England will normally “look through” low inflation readings caused primarily by global forces, such as this one, on the grounds that its policy cannot control these fluctuations. But the “core inflation” measure, which strips out these volatile, globally set prices, is also far below the Bank’s 2% target at 0.8%. This suggests demand is simply not high enough to justify applying the brake of a rate rise. Calls have been made for a rise in the UK and the US on the grounds that low yields are driving investors into riskier assets. However, risks emanating from the financial sector fall under the mandate of the Prudential Regulation Authority, which regulates banks using instruments less blunt than interest rates.

If anything, Bank Governor Mark Carney is under pressure to move rates in the other direction. Since mid-2014 most central banks have loosened monetary policy as inflation became less of a risk while global growth stuttered. Major economies’ currencies (except for the dollar) have become cheaper and so their exports more competitive than the UK.