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No change in Bank Rate comes as no surprise

Following its May meeting the Bank of England’s Monetary Policy Committee (MPC) has announced that Bank Rate will remain unchanged at 0.5%. The decision reflects clearly how sentiment about the UK economy is changing. Go back a few weeks and my forecast that Bank Rate would be unchanged was at odds with the consensus (Is there any reason for the Bank of England to raise Bank Rate in May?). But by the time the MPC convened it had become clear that the time was not right for a further tightening of monetary policy.

The news is a further blow to savers who will continue to endure interest rates on their accounts that are below the rate of price inflation. With such negative interest rates savers should really be seeking alternative investments for money that can remain invested, and not drawn on, for two or three years at least.

Frankly there seems little prospect that interest rates will rise much, if at all, in the rest of this year as too many economic indicators are crying out for monetary policy to remain relaxed.

  • Price inflation has started to ease, with the rate for the Consumer Price Index (CPI) falling to 2.5% in March - its lowest rate for a year. So higher interest rates are not needed currently to bear down on inflationary pressures.
  • Earnings inflation remains modest despite the low rate of unemployment.
  • The fall in unemployment witnessed in recent years would appear to be ending.
  • Economic growth remains weak with the most recent figures for the first quarter of 2018 not helped by the poor late winter weather.
  • Retail sales in the first quarter of 2018 were lower than in the last quarter of 2017. Sales in April were 4.2% lower than in April 2017 – albeit with the data skewed by the early timing of Easter. Additionally the business media is awash with the difficulties currently being experienced by many well-known retail chains.
  • Business investment remains weak and is not helped by the ongoing Brexit uncertainties. Clearly many companies are suspending, temporarily at least, their investment plans.
  • Whilst the squeeze on household finances has eased slightly, courtesy of lower price inflation, there is evidence from the British Retail Consortium (BRC) that the scope of consumers for discretionary spending is limited.
  • The latest data show that the availability of consumer credit - via loans, overdrafts and credit card debt – eased significantly in the first quarter of the year.

That adds up to eight good reasons for Bank Rate not to be raised. The direction of at least four of these economic factors needs to be reversed, in my view, before a rise in Bank Rate is necessary. How long will we have to wait for that to happen?

Martin Upton

Director, True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

10th May 2018

True Potential PUFin is based at the Open University Business School in Milton Keynes, UK

True Potential PUFin is the first and only personal finance research centre in the UK that has an active teaching programme freely available to the public. Supported by the University’s excellence in delivering distance learning, the Centre is uniquely positioned to develop the public’s financial capability and to research the impact and effectiveness of its education programme.

True Potential PUFin is supported by a five-year programme of financial support provided by True Potential LLP.

The views of True Potential PUFin academics do not necessarily reflect the views of True Potential LLP

 

 

 

 

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