Advertisement

SKIP ADVERTISEMENT

Bank of England Holds Rates Steady

LONDON — The British central bank said on Monday that it would maintain its benchmark interest rate at 0.5 percent, the level since March 2009, as the markets digest the implications of the Conservative Party’s election victory last week.

The Conservatives, led by Prime Minister David Cameron, made fiscal tightening a key tenet of their campaign, and many economists predicted that the party’s victory meant the Bank of England would further delay any rate increase. As the government cuts spending, the idea is that the Bank of England mitigates the impact of those cuts with low interest rates to encourage borrowing and other economic activity.

The JPMorgan economist Allan Monks trimmed his forecast for Britain’s 2016 growth rate to 2.3 percent, from 2.6 percent, based on the impact of expected budget cuts. The Conservatives have pledged to eliminate the overall deficit, now running around 5 percent of gross domestic product, by 2019.

Samuel Tombs, senior economist for Britain at Capital Economics in London, wrote last week in a client note, “The economy remains on track for a major reintensification of the fiscal squeeze next year.”

But the picture is more complicated than that, other economists said.

British economic growth slowed to 0.3 percent in the first quarter, half the rate of the final quarter of 2014. Manufacturing and construction figures have been soft. Mr. Cameron has promised to call a referendum on whether Britain should leave the European Union, adding to the economic uncertainty. And wages, which the central bank predicted would grow 3.5 percent in 2015, are expanding at a much slower pace. All of those factors suggest that rates will stay low for longer.

But driving the case for a move toward “normalization,” or higher interest rates, are rising oil prices and the eurozone, which is in better shape than it was in February, when the central bank issued its latest inflation report. Additionally, the uncertainty that surrounded the election — and predictions that it would result in a hung Parliament — has been removed.

“The market hasn’t had much stability in terms of where it’s predicting the next hike,” said David Tinsley, chief economist for Britain at UBS. One moment the market expects rates to rise next summer, and another it expects them to rise next spring. “Unless there is a firmer story on wage growth,” he said, “that will continue to be the story.”

The Conservatives swept to victory last week in spite of near-unanimous opinion polls indicating the election would be neck and neck. The Liberal Democrats, who had been in a governing coalition with the Conservatives, lost seats, as did the more left-leaning Labour Party. The Scottish National Party made significant gains, presenting a challenge for Mr. Cameron, who will have to figure out how much power to cede to Scotland.

Against that new landscape, the Bank of England’s Monetary Policy Committee voted on Friday to keep rates steady. (The announcement of the decision was postponed until Monday to avoid conflicts with the election.)

On Wednesday, the central bank is set to release its latest economic predictions in a new report on inflation. Inflation in Britain has been zero percent for the past two months, the result of falling oil prices and lower food prices. The central bank seeks to hit a 2 percent inflation target and when it falls short, Mark J. Carney, the central bank’s governor, is required to write a letter to the chancellor of the Exchequer explaining why the target has not been met.

In February, the Bank of England predicted that inflation would briefly dip below zero in the second quarter. At the time, Mr. Carney praised the strength of the British economy, and said the drop in inflation would be temporary.

While Britain’s economy grew at a healthy 2.6 percent clip last year, wages have remained largely stagnant, suffering from the effects of the 2008 financial crisis. The issue was a critical one in the election as Labour sought to capitalize on anemic wage growth to make its case that only a small portion of Britain was feeling the benefits of the recovery. The Conservatives took credit for the strong economic figures and argued that they needed more time to bring the fruits of the recovery to more people.

After the election, stocks rose in London and the pound moved higher. On Monday, the FTSE 100 stock index had risen about 0.17 percent around midday in London, while the pound held steady.

A version of this article appears in print on  , Section B, Page 2 of the New York edition with the headline: Business Briefing; Bank of England Keeps Interest Rate Steady at 0.5%. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT