UK keeps interest rate at record low despite Fed hike

Why has the Bank of England kept UK interest rates low when UK inflation has increased and the US Federal Reserve has raised its benchmark rate?

A London bus zooms past the Bank of England in London's old financial district
The Bank of England announced no change in the UK's record low interest rate of 0.25 per cent on Thursday despite the US Federal Reserve raising its benchmark rate less than 24 hours earlier.The Fed voted to raise its key rate target to a range of 0.75-1.0 per cent - an increase of a quarter of one per cent - on the back of rising employment, pay and inflation.Janet Yellen, who chairs the Fed, said the "modest increase" was appropriate "in light of the economy's solid progress". She added: "Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market, and a sustained return to two per cent inflation."

Bank of England decides to keep base rate at a record low

In the UK, even though inflation is nudging towards the two per cent target and is expected to exceed it later this year, the Bank of England's Monetary Policy Committee (MPC) decided to keep the base rate at its record low. Eight members of the committee voted to keep the rates on hold but one, Kristin Forbes, wanted a rise to 0.5 per cent in the face of increasing inflation.Minutes of the MPC meeting said that Ms Forbes feared that inflation "is rising quickly and was likely to remain above target for at least three years", reflecting more widespread concerns that, despite healthy economic growth and record high unemployment, the rock bottom rate is weakening the pound and feeding inflation.
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MPC members halved the rate last year in the uncertainty following the Brexit vote in the referendum and the minutes conceded: “With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”

Sterling rises against the dollar and Euro

Sterling rose against the dollar and euro after the MPC announcement, apparently on the prospect that an increase might be in the offing in the immediate future.Fawad Razaqzada, market analyst at Forex.com, commented: "Like the Bank of Japan and Swiss National Bank, the Bank of England decided to keep its monetary policy unchanged. But it wasn’t a unanimous decision as Kristin Forbes voted for a 25 basis point rise amid concerns over inflation. This caused the pound to jump across the board."Barry Naisbitt, chief economist at Santander, said: “It is clear that the economy grew at a robust pace in the second half of last year, and more rapidly than expected. As a consequence, the unemployment rate continued to fall and in January it reached 4.7 per cent, the lowest rate since 1975.“With the depreciation of sterling, inflation has started to rise and in January, at 1.8 per cent, it reached its highest rate for over two years. With a clear expectation that inflation will rise further, there are concerns that higher inflation this year could reduce households’ real earnings growth.“Taking a balance of views on this, the issue of whether ongoing uncertainty could restrain companies’ investment spending and other evidence into account, the MPC today decided to continue to hold Bank Rate at its historic low of 0.25 per cent.”Jeremy Duncombe, director at Legal & General Mortgage Club, said that logic suggested the UK economy was not ready for a rate rise, especially with the triggering of Brexit negotiations a fortnight away.He said: “Today’s announcement from the Bank of England is good news for borrowers. Borrowers on an SVR could save themselves around £2,000 a year by switching to a better deal. They should speak to a mortgage broker to make sure they’re on the best possible deal for their circumstances – after all, these rates won’t be around forever.”For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory

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