Interest rates to be kept on hold

Interest rates will be kept on hold tomorrow as Bank of England policymakers continue to believe that it is too early to scale back stimulus efforts.

Bank of England policymakers believe it is too early to scale back stimulus efforts
Bank of England policymakers believe it is too early to scale back stimulus efforts

Most economists expect the Bank's Monetary Policy Committee (MPC) will not lift interest rates from 0.5% - where they have been since 2009 - until next year.

This month's meeting of the MPC will finish tonight in order to allow some members to attend International Monetary Fund meetings in Washington, although the decision will be announced as usual on Thursday.

Investec chief economist Philip Shaw said the shortening of April's meeting was telling in indicating that very little looks set to change this month.

He said: "For now with the economy growing respectably but not roaring away, we see it likelier than not that the MPC will avoid tightening policy this year, especially with inflation expected to remain below target over the medium term."

With the Consumer Prices Index (CPI) rate of inflation at 1.7% - comfortably below the Bank's 2% target - the MPC has leeway to leave rates on hold.

According to the IMF, the UK is set to be the world's fastest-growing major advanced economy this year with GDP expected to increase by 2.9%.

The IMF's latest World Economic Outlook gave its backing to policies pursued by Chancellor George Osborne and Bank of England governor Mark Carney but warned over the risk posed by surging house prices.

GDP remains below its pre-recession level six years ago and l atest monthly survey figures from the three main sectors of the economy are unlikely to shake the MPC from its caution over the state of the recovery.

They showed that while construction, manufacturing and services were all continuing to grow robustly in March, the pace of expansion had slackened off, indicating that the recovery had slowed to its weakest pace in nine months.

The Bank previously pledged not to lift rates until a fall in unemployment to 7% although that "forward guidance" policy has now been abandoned after joblessness declined more quickly than had been expected as growth picked up speed last year.

Rate-setters are now using a new "fuzzy" guidance linking monetary policy to a more opaque measure of how far the economy is running below its capacity. They have indicated that more sustainable growth is needed before any hike.

Howard Archer of IHS Global Insight said: "The MPC is not taking sustained recovery for granted and very much wants to see it become more balanced with business investment seeing sustained improvement and exports increasingly kicking in.

"There are some signs that the UK economy may recently have lost a little momentum, although it still appears to be growing at a healthy clip."

Last week, Bank governor Mark Carney refused to rule out a pre-election rise in interest rates, but stressed that any rise would be gradual.

He added that despite unemployment falling more quickly than expected, there remained "slack" in the labour market "right across the country", more of which needed to be used up before any hike.

Mr Carney told a newspaper the recovery in the economy had been "uneven" and needed to be seen across the country.

Martin Weale, a fellow member of the MPC, has previously indicated that a rise in the cost of borrowing was likely next spring, and appeared to suggest it would come before the May general election.