By Roland Jackson, AFP
LONDON–The Bank of England (BOE) is set to keep interest rates at a record-low 0.50 percent this week, as it eyes slowing inflation before next year’s election, analysts say. Both Britain and the separate eurozone are worried about unduly low inflation, but this is a much bigger problem in the single currency area where growth is far less buoyant. The upshot is an overall climate of talk that monetary conditions in Britain could be tightened next year, while in the eurozone they may soon be eased.
The Bank of England’s rate-setting Monetary Policy Committee (MPC), which concludes its two-day September meeting on Thursday, is likely to leave its quantitative easing (QE) cash stimulus at 375 billion pounds (US$622 billion, 473 billion euros). The MPC was divided in August for the first time in more than three years, with two policymakers breaking ranks to call for a quarter-point rise from 0.50 percent — where rates have stood since March 2009. The panel voted 7-2 in favor of no action, citing “insufficient evidence” of inflationary pressures. British Inflation Slows Policymakers will be mindful this month of a further easing of inflation, which has held below the bank’s official 2.0-percent target so far this year. Britain’s 12-month inflation slowed to 1.6 percent in July from 1.9 percent in June. The central bank hinted last month that an interest rate rise might have to wait for as long as pay lags behind a robust recovery of the economy. The BOE, led by Canadian Mark Carney, halved its forecast for wages growth this year to just 1.25 percent from an earlier estimate of 2.5 percent. “The recent weakness of wage growth and inflation, as well as signs that the housing market recovery is fading, have in fact strengthened the case for leaving rates on hold for a few more months,” said Capital Economics analyst Samuel Tombs. He added: “There has not been an obvious trigger over the last month for any MPC members to change their vote at September’s meeting.” Many economists do not expect an increase before Britain’s general election in May 2015. “We are reasonably confident that next week’s MPC decision will result in no change to the stance of policy,” said Investec economist Philip Shaw. “However, what is far from clear is when the first increase in interest rates will take place. “As we have argued for a while, it would be wise to consider the timing of May’s general election — history shows that it is rare for rate hikes to occur very close to polling days.” Markets are nevertheless watching for any signs of when the BOE will begin to increase rates as Britain’s economic recovery outpaces sluggish growth in the neighboring eurozone.