THE BANK of England has highlighted the “restraining impact” of fiscal consolidation on UK economic activity, and signs of a slowdown in growth, after its Monetary Policy Committee held base rates at a record low.
The MPC voted eight-to-one to hold UK base rates at 0.5 per cent, where they have been since March 2009.
Ian McCafferty found himself alone for a second consecutive month in pushing for an immediate quarter-point rise in base rates.
Announcing the MPC’s decision, the Bank of England said that, on the one hand, UK domestic demand, and consumer spending in particular, had been resilient, buttressed by a recovery in real income growth and productivity, supportive monetary policy, and robust business and consumer confidence.
However, it added: “On the other hand, the ongoing fiscal consolidation has had a restraining influence on activity and global growth has continued at below-average rates.”
And the Bank of England highlighted signs of a deceleration in UK growth.
It said: “The most recent official estimates and survey data are consistent with a gentle deceleration in UK output growth since its peak at the beginning of 2014.”
The UK economy grew by 0.7 per cent in the second quarter.
However, a survey published this week by the Chartered Institute of Procurement and Supply showed that growth of the UK’s dominant services sector slowed to its weakest pace in two-and-a-half years in September.
Economists believe that growth is likely to have slowed to about 0.5 per cent in the third quarter.
The Bank of England highlighted the potential dampening impact on the UK economy of an intensification of the slowdown in growth in China, although it also highlighted the resilience of the eurozone.
It said: “Deterioration in the global demand environment would slow the pace of expansion further. That could occur, for example, were the slowdown currently under way in a range of emerging economies, including China, to intensify. Growth in the euro area, the United Kingdom’s main trading partner, has so far remained relatively resilient.”
Howard Archer, chief UK economist at consultancy IHS Global Insight, said: “While the minutes do not come across as particularly hawkish to us, they do reinforce our view that the markets have over-reacted in pushing back their expectations of the first Bank of England interest rate hike from 0.5 per cent to 0.75 per cent to late 2016 or early 2017.”
He added: “An interest rate hike from 0.5 per cent to 0.75 per cent sometime in the first half of 2016 still looks much more likely than not to us.”
The Bank of England continued to signal that, when benchmark UK interest rates did start to rise, they would do so at a relatively gradual pace. And it reiterated a belief that rates would not rise as far as in past cycles.
The central bank said: “All (MPC) members agreed that the likely persistence of the headwinds restraining economic growth following the financial crisis means that, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
“Such guidance, however, is an expectation and not a promise: the path that Bank Rate will actually follow over the next few years will depend on economic circumstances.”
The MPC voted unanimously to maintain the scale of its stimulatory quantitative easing programme at £375 billion.
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