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No rate rise till Autumn 2015

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20/01/2014
The Bank of England will keep the Base Rate of interest at 0.5% until at least 2015, according to accountants.
No rate rise till Autumn 2015

The Bank of England’s Monetary Policy Committee (MPC) should hold off on raising interest rates even though its stated threshold for doing so – a fall in the unemployment rate to 7% – is in sight, according to a report.

As well as unemployment, the Committee should add a requirement for real wages to be rising before it increases rates, according to the latest Ernst & Young (E&Y) ITEM Club report.

The report highlights that, as the annual rate of inflation has steadily fallen in the last two years, this has not been accompanied by a rise in earnings. Over the same period that saw CPI inflation fall from 4.7% to 2.1%, earnings inflation has also fallen, from 3.2% to 1%.

The E&Y report also said the MPC should preferably hold off increasing interest rates until business investment and exports have also revived.

“The MPC has set a fall in the unemployment rate to 7% as the threshold for it to consider a rise in interest rates,” the report reads.

“However, with this threshold now in sight, but real wages still falling and the consumer continuing to dominate the recovery, the MPC faces a dilemma.

“Fortunately, with inflation set to move below the 2% target, the MPC will have time to assess this situation, and we do not expect the first rate hike until the Autumn of 2015.”

The E&Y Item Club report predicts that unemployment will fall below 7% in the first half of 2014, but that wages will grow only 1.8% in 2014, before rising by 2.7% in 2014, and 3.5% the year after.

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