Interest rates set to be frozen as pace of economy slows

● Falling inflation and muted growth expected to stay Bank of England’s hand

The Bank of England is set to sit on its hands this week on interest rates as a raft of business surveys are expected to show the UK’S faltering growth continued in July.

Markit/cips surveys of the services, manufacturing and construction sectors are forecast by many City economists to show that the pace of economic growth continues to decline after recent official data showed GDP of only 0.3 per cent in the second quarter.

Howard Archer, chief economic adviser to the EY Scottish Item Club, said: “The odds now very strongly favour the Bank of England keeping interest rates at 0.25 per cent on Thursday after the August monetary policy committee (MPC) meeting. Furthermore, the case for an interest rate hike any time soon is currently dwindling.

“A few weeks ago, there had seemed to be a mounting likelihood that interest rates would rise sooner rather than later, with a hike in August a genuine possibility. Three out of the current eight MPC members voted for an interest rate hike at the June MPC meeting, while a fourth member subsequently indicated that he was minded to vote for a rate hike in the second half of the year if inflation, in particular, and growth remained resilient.”

But Archer added that since then the economic situation and outlook had become more “uncertain”, with the inflation pressures that might have caused a rate hike from historical lows easing back to 2.6 per cent in June from 2.9 per cent in May.

The likely freezing of rates, which were cut by a quarterpoint to just 0.25 per cent last summer after the Brexit vote, yet again will disappoint savers who have been earning spartan returns on their savings since the financial crash.

Philip Shaw, chief economist at Investec, said: “I don’t think interest rates should move. There is very little in the way of direct inflationary pressure.

“In the last six months we have seen a slowdown in the pace of economic activity, with consumer spending slowing down, even though the services purchasing managers data does not include retail.

“We are likely to see a consistent picture of this in this week’s surveys. What we are not expecting is any major rebound (in business activity) or any slide into recession.”

City economists believe that data since last spring showing wage growth is trailing inflation, allied to continued Brexit uncertainties, also make it likely that BOE governor Mark Carney and his MPC colleagues will stay their hands on any monetary tightening.

In addition, Kristin Forbes, one of the MPC members in favour of an early base rate increase, has left the panel. Archer added: “There are no indications as to the stance of the new MPC member, Silvana Tenreyro,but it seems unlikely she would vote for an interest rate hike in her first meeting given the uncertain situation and outlook.”

Analysts now expect a six to two majority vote in favour of keeping rates on hold.