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Published On: Thu, Aug 7th, 2014

Bank of England holds rates steady at a record low

Bank of England kept interest rates at a record low which gave more time for recovery to the British economy.

Bank of England holds rates steady at a record low

Bank of England kept interest rates at a record low on Thursday. That is positive for Britain’s economy, even though this time the decision was preceded by differing opinions of voting members.The Policy Committee of the BoE kept the rate at 0.5 percent, level maintained since the start of the financial crisis.

Following the bank’s two-day meeting, there was no statement coming out, so there is about a fortnight before investors learn if any committee members have voted for the raising of interest rates. When polled by Reuters, economists predicted that the first dissent between MPC members is to occur at the August meeting.

The expectations for the British economy are for an over 3 percent growth this year. They also include expectations for BoE raising rates, the first central bank within a major developed economy to do so. The first hike is anticipated at the end of this year or the beginning of 2015.

Speculations on a rate hike contributed to an over 10 percent rising of the sterling against a basket of currencies in the 12 month period to early July, but then the cable met strong resistance. Currently, the GBP/USD is trading at  1.6815, almost 4 figures down from the high of 1.7192, touched on July 15.

Some MPC members consider time is ripe for some tightening of monetary policy, in the wake of the unemployment slump from 7.8 to 6.5 percent from a year earlier. Others, however, interpret the slow rise in wages as a warning there is yet some time before the labor market recovery feeds into higher inflation, which was 1.9 percent in June, just below the target. The slack earnings growth made some policy makers anxious because higher debt servicing costs could divert economic recovery in Britain from its upward course.

Apoll published on Monday indicated mortgage holders were in the course of reducing spending while expecting a rise in interest rates. Less than 20 percent of those polled think such a rise would adversely impact their personal finances.

Next week, the Bank of England is to produce its quarterly economic projections, and it is expected it will shrink forecasts regarding wage growth.

According to Charles Goodhart, former MPC member, the uncertainty about the rate of unemployment slumping means BoE should not implement the rise yet.

There is another circumstance that may contribute to the lower likelihood of an interest rates rise. There are indications that British economy momentum might be slowing down.Despite steady growth in the services sector, May and June were not good for manufacturing which marked a decline.

There are some other risks which can impede Britain’s recovery. The grueling developments in Ukraine are enhancing tensions that can adversely impact Europe. Another risk is posed by Scotland’s voting for leaving the UK, in a referendum scheduled for September 18.

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