Bank of England keeps interest rate at 0.5%

A rate hike is around the corner, says bank governor Mark Carney, but the timing will depend on how the economy fares.
A rate hike is around the corner, says bank governor Mark Carney, but the timing will depend on how the economy fares.PHOTO: AGENCE FRANCE-PRESSE

LONDON • The Bank of England yesterday said it had voted to leave its main interest rate at a record low of 0.5 per cent in the face of zero inflation.

Governor Mark Carney warned that an interest rate hike is drawing closer but that the exact timing could not be predicted in advance.

At a press conference, he said he stuck to his personal view that the decision about when to start raising rates from 0.5 per cent currently was likely to come into sharper relief at the turn of the year. "It will be the product of economic developments and prospects," he said.

Of the nine-member Monetary Policy Committee (MPC), only one official voted in favour of starting to raise rates this month. The committee also maintained the central bank's level of cash stimulus pumping around the British economy at £375 billion (S$810 billion).

The sterling dropped the most in a month against the greenback and government bonds rallied after the vote result, which was predicted by none of the 20 economists surveyed by Bloomberg.

The minutes of the MPC meeting showed policymakers were concerned that the strength of the sterling could dampen inflation.

In recent weeks, traders have become increasingly bullish about the timing of an increase in the bank's 0.5 per cent main rate, with forward contracts based on the Sterling Overnight Index Average (Sonia) implying a move next May.

"It's a dovish surprise," said money manager Mark Nash at Invesco Asset Management, which oversees about US$768 billion (S$1.06 trillion) in funds.

"The pound will get hit, while gilts should rally," he said. "The market was caught out as British growth has been very decent. This reinforces a view that rates will rise in February next year. It probably won't happen before that."

AGENCE FRANCE-PRESSE, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on August 07, 2015, with the headline 'Bank of England keeps interest rate at 0.5%'. Print Edition | Subscribe