Rates firm amid market turmoil

The Bank of England left interest rates on hold once again as it forecast a slowdown for UK economic growth in the third quarter amid increasing risks from turbulent global conditions.

Members of the Bank’s Monetary Policy Committee (MPC) voted 8-1 to leave rates on hold at 0.5 per cent, where they have been since 2009, mirroring the voting numbers last month.

Minutes of the MPC meeting revealed that the Bank has now downgraded its forecast for UK gross domestic product (GDP) growth in the third quarter from 0.7 to 0.6 per cent after weaker than expected recent economic data.

This would be a slowdown from 0.7 per cent growth in the second quarter.

Meanwhile, the MPC found that overall risks from the world economy had “probably increased” amid signs of slowdown in China, which has caused severe market turbulence in recent weeks, and the prospect of a coming interest rate hike in the US.

UK economic recovery and an acceleration in wage growth in recent months has added to the argument for a rate hike to keep inflation below its two per cent target in coming years.

But the slide in inflation to near zero has eased any immediate pressure on policymakers for a rate rise.

The minutes showed Bank officials judged the upturn in wage costs was not strong enough to see inflation returning to that level.

However, one MPC member, Ian McCafferty, judged that there were signs of building inflationary pressure, while it was “premature” to assume that turbulence in China would have an effect on this.

He voted to raise rates to 0.75 per cent.

Others who saw risks of higher inflation still voted to leave rates on hold.

Markets have pencilled in a UK rates rise for early next year, while there is also speculation that in the US, rates could be hiked by the Federal Reserve possibly as soon as next week.

A UK rate hike will mean greater borrowing costs but provide some relief to savers whose nest eggs have been severly eroded by low rates.