Base rate kept at 0.5% amid stalling growth
The Bank of England’s Monetary Policy Committee (MPC) has unanimously voted to maintain the bank rate at 0.5%, contrary to speculation in the press.
Some commentators had expected at least one member to vote for a rate cut to 0.25% - while nobody expected enough votes for this to actually happen, it would have been useful as a signal of further action in the months to come.
In addition to the base rate being kept at 0.5% for the 86th consecutive month, is the news that growth in the UK has stalled and that the consumer prices index (CPI) rate of inflation rose to 0.5% in March which is still far below the 2% inflation target. This has been attributed to falling energy and food prices. What’s more, the Bank believes that slow growth will continue into the second quarter of the year.
The report issued by the Bank of England states: “The most significant risks to the MPC’s forecast concern the referendum.”
Andy Scott, economist at HiFX agrees: “Anecdotal evidence suggests [the referendum] is weakening confidence and causing companies to put investment plans on hold until the outcome is known. They [the MPC] highlighted the risks around Brexit such as a significant depreciation in Sterling, a rise in unemployment and higher inflation.”
Following this poor data, George Osborne says: “Today we have a clear and unequivocal warning, not just from the Governor of the Bank of England but also in the collective judgement of the Monetary Policy Committee, that a vote to leave would mean both materially lower growth and notably higher inflation.” He goes on to add: “So either families would face lower incomes because inflation would be higher, or the economy would be weaker with a hit to jobs and livelihoods [if we leave].”
The EU referendum is one of the more polarising topics in the UK so it’s important to disassociate motive from fact in statements such as these. With the Bank’s report admitting that traditional economic forecasting models are becoming less reliable than they used to be, one thing is clear: whatever you believe is best for the future of the UK, even the experts aren’t pretending they have all the answers.
In a time of low interest rates, look at our best savings rates, updated weekly.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.