When will interest rates start to rise?

7 April 2010

The Bank of England has voted to hold the official rate of interest at 0.5%.

The central banks also decided not to extend its quantitative easing scheme beyond the £200 billion of new cash already injected into the economy.

Interest rates have now been at 0.5% since March 2009, as the economic recovery continues.   

This month's vote by the Monetary Policy Committee (MPC) – the group of Bank of England economists responsible for monetary policy – is the last ahead of the general election on 6 May.

Economists say the decision comes as little surprise.

Philip Shaw, economist at Investec Securities, says: ”With the recovery unfolding gradually there seems little need for additional quantitative easing, and it remains too early to start tightening. The current super easy stance of policy is therefore still appropriate.”

What lies ahead?

Shaw believes the next MPC meeting on 10 May will be more significant, as it will coincide with the publication of the next Bank of England Inflation Report.

However, he adds the fact that the economy remains weak could leave the MPC reluctant to change its ‘wait and see’ mode.

Shaw adds: “The MPC will also hope that the election result reduces some uncertainty over the stance of fiscal policy.”

The Conservative Party has promised to make immediate spending cuts if elected to power whereas Labour will wait until next year.

A Tory victory could see the MPC delay rate hikes, or at least introduce these more slowly, Shaw says.

“Our central case remains that rates will begin to rise in quarter four this year, based on a Conservative victory, but it is feasible that a round of sharp public expenditure reductions over the medium term results in rates being kept at 0.5% into 2011,” he adds.



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