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HR News Update – Bank of England holds base rate at 0.5 percent for 65th month in a row

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“Second-guessing the actions of central bankers seems to have become a national pastime.” Says Ben Brettell, Senior Economist, Hargreaves Lansdown.

While today’s no-change decision comes as no surprise, the minutes of this week’s meeting, due to be released on the 23rd of July, willbe scrutinised for clues as to when UK interest rates might eventually rise. If any members of the Monetary Policy Committee voted for higher rates, the market could take this as a signal that a hike is pencilled in for later this year. On the face of it, falling unemployment and strong GDP growth point to a robust UK recovery. However, a closer look at the evidence suggests the economy is not yet strong enough to withstand a rate rise.

The private sector remains highly indebted, and the impressive unemployment figures mask a number of underlying factors. Many of the jobs being created are among the self-employed – workers who can effectively price themselves into a job. Furthermore a high proportion of part time workers are seeking full time work. It seems fair to assume that a significant degree of slack in the labour market remains, and I believe the Bank of England will want to see hard evidence that this slack has been absorbed before considering higher interest rates.

While the market obsesses over the timing of the first move in interest rates, I believe their eventual path is far more important. On this the Bank has been quite clear – when rates do start to rise, they will do so slowly, in small increments, and they will eventually stabilise at much lower levels than we saw pre-crisis. This means that, provided the economy is strong enough, we can expect rates of 2-3 percent in three to five years’ time. 

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