Interest rates held but a rise is drawing closer
HOMEOWNERS breathed a sigh of relief yesterday as the Bank of England voted to keep interest rates at their historic low of 0.5 per cent.
But governor Mark Carney warned the time for a rate rise is “drawing closer”, with next spring likely to herald increases.
The pound dropped by a cent against the US dollar and the euro after the Bank’s quarterly inflation report signalled that rates will stay on hold until early 2016.
It came as the Bank’s Monetary Policy Committee voted 8- 1 to leave interest rates at 0.5 per cent – a level they have remained at for more than six years.
Mr Carney said: “The likely timing of the first Bank rate increase is drawing closer.
“However the exact timing of the first move cannot be predicted in advance.
“It will be the product of economic developments and prospects. In short, it will be data dependent.” Plunging oil prices and the sharp strengthening of the pound means inflation, which has hovered at around zero, looks likely to remain at that level for the rest of the year, leaving most MPC members in no rush to raise rates.
Mr Carney said the fall in inflation had been “the most striking development in the UK in the past year”.
He said: “The near- term outlook for inflation is muted and the fall in energy prices over the past few months will continue to bear down on inflation until at least the middle of next year.
“I wouldn’t be surprised if we have another month or two of negative inflation given the very substantial move in oil prices and the changes in utility prices.”
Oil prices have halved since last year amid a glut of supply and after starting to recover have recently been pulled back again with more crude expected to flood into the market from Iran with the lifting of sanctions after it reached agreement with the US over its nuclear programme.
In the UK, two consecutive five per cent cuts in household bills by leading energy supplier British Gas are also likely to weigh on inflation. Meanwhile, the strong pound – up by 20 per cent since March 2013, making imports cheaper – should also pull down inflation.
The Bank also increased the forecast for expansion in the wider economy, from 2.5 per cent to 2.8 per cent against a backdrop of strong consumer demand.
Mr Carney added: “This is not just about inflation but inflation in the medium term, so people can enjoy the dividend of lower petrol and food prices without worrying about the pay back.”
Interest rates have been on hold since March 2009 but the economic recovery has heightened speculation about the need for them to begin to increase again.
Gillian Guy, chief executive of Citizens Advice, said: “Households need to be primed and ready for a rise in interest rates. Many people are just about managing financially which means even a small interest rate rise can tip them over the edge.
“Any rise in interest rates must be slow and steady so people have time to adjust. It is crucial that people have access to free money and debt advice in order to budget for a rate rise.
“Creditors can help borrowers by explaining the impact a rise will have and help them to prepare, as well as recognising where they can be flexible to help people keep afloat.”