Commenting on the Bank of England’s decision to hold interest rates at 0.5%, published today alongside the minutes of the Monetary Policy Committee meeting and the Bank’s Inflation Report, Michael Martins, Economic Analyst at the Institute Of Directors, said:
“The IoD has been calling for some time for the beginning of small and gradual rate rises, but the Bank has made it clear today that it won’t be making its move soon. The UK’s recovery has strengthened in recent months, returning to roughly where it was before the financial crisis, with unemployment low, productivity picking up and wages growing. These are welcome statistics which would suggest the time for a rate rise is getting closer, but the Bank is clearly worried about underlying economic weakness facing the UK.
“Stagnation in Europe has forced UK businesses to shift trade towards markets further afield, like China. Unfortunately this comes just as emerging markets are slowing down and the UK is being caught in headwinds being blown from all over the globe. However, a prolonged period of record low interest rates has created an ideal environment for asset bubbles to develop. Although difficult to detect, low interest rates incentivise purchases of what may turn out to be artificially inflated high-value assets, like housing.
“Inflation, which is meant to be the focus of the Bank’s decision-making, is largely outside of its control at the moment, being held down by low global oil and food prices. The Governor and his committee clearly have many factors to balance. Crunch-time will come when the US Federal Reserve decides to raise rates, expected later this year. When the US leads, the UK should follow, with the first steps to returning interest rates to a more normal level”