Weaker-than-expected state of the economy in the beginning of 2018 has forced the Bank of England to return the plans to increase interest rates Before the end of this year.
Although the Bank believes that the soft patch in growth will prove temporary, seven of the nine members of the monetary policy Committee (MPC) adopted a wait-and-see approach to raising official borrowing costs on Thursday, voting to keep them at 0.5%.
Mark Carney, Governor of the Bank, said the rate hike was more likely than not before year end, assuming the economy has recovered, as expected from the first quarter where it grew by 0.1% – the lowest rate in more than five years.
Two members of the Committee, Michael Saunders and Ian McCafferty, said that the increase in payment caused by falling unemployment demanded immediate increase in interest rates.
Questions and answers that the Committee on monetary policy?
One of the first steps of Gordon brown as Chancellor in 1997 was to hand control of interest rates to an independent Bank of England. Previously, the cost of borrowing, it was decided between the Chancellor and the Governor of the Bank.
Tariffs are set by the Bank of monetary policy Committee (IPC), which consists of nine members – the Bank of England Governor, three Deputy governors for monetary policy, financial stability and markets and banking, chief economist and four external members appointed directly by the Chancellor.
Four external members are appointed to bring ideas and knowledge outside the Bank at the meeting. The representative of the Treasury also attends meetings and discuss policy issues, but was not allowed to vote.
The Committee meets every month to discuss whether to cut, raise or leave interest rates unchanged, as well as other measures such as quantitative easing. Decisions are made after the vote of each member of the Committee; in case of a tie, the Governor has a casting vote.
Minutes of meetings are published after the decision was announced bets.
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The Bank’s decision contained in its quarterly inflation report will come as no surprise to the city, which is expected to Threadneedle Street, to ditch plans to tighten policy this month in light of weak growth, faster-than-expected decline in inflation and evidence that consumers are cutting down.
Even so, the news that the rate increase is delayed as a result of the pound falling against the dollar to below $1.35, the lowest level in four months.
Protocol this week, the MPC meeting minutes revealed that rate rises will in order that the government’s 2% inflation target, but the language was much milder than in February, when the Bank stated that policy may need to tighten sooner and to a greater extent than the markets expected.
Three months ago the Bank was hatching growth of 0.4% in the first quarter and 1.8% by 2018, as a whole. The near-stalling of the economy led the MPC to cut its annual growth forecast to 1.4% this year.
But the faith of Threadneedle Street, that little has changed fundamentally since February and that the economy grew more than 0.1% and survived an assumption that an increase of a quarter point in borrowing costs, perhaps, when the next inflation report will be released in August. Carney said that if the economy held in the Bank expect a “moderate tightening” of the policy will be justified.
The Bank believes that the economy has the potential growth at around 1.5% per year, but demand will slightly exceed this limit in the coming years in the absence of a tender of rising interest rates. Financial markets expect three quarter-point increases over the next three years.
As in February, the MPC pointed to the drop in the unemployment rate to its lowest level since the mid 1970-ies as a reason why prices eventually have to rise. Wage growth is expected to build as employers struggle to recruit and retain staff.
The Bank’s economists think that in the first quarter growth rate was distorted by unusually cold weather and will eventually be revised up to 0.3%. “The performance review, and a certificate from the Bank (regional) agents, suggested that growth was slightly stronger in the first quarter than implied by prior estimates,” England said.
Even so, seven members of the MPC who voted for no change stated that they wanted confirmation that the economy is experiencing a soft patch, before voting for a rate hike.
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“Considering the recent decline in consumer credit and housing market have been somewhat greater than usual uncertainty about the short-term dynamics of consumer expenditure and to what extent households will adjust their spending and savings in the past the decline in their real incomes”, – stated in the Protocol.
Frances O’grady, General Secretary of the trade Union body of trade unions, said: “this is the right decision not to raise interest rates. You don’t kick the economy when it’s down. Now the government must make it our ailing economy on its feet, providing decent jobs and real wage growth”.