Bank of England Holds Rates After Weak Growth

The Bank of England (BoE) held interest rates on Thursday at their current historic low of 0.5 percent after weaker than expected gross domestic product (GDP) figures last week effectively killed off any hope of a rate rise this year.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

The Bank also maintained monetary easing at its current level of 200 billion pounds ($326.3 billion). The move had been widely expected after data published last week showed the UK economy grew by less than had been hoped.

The Office for National Statistics (ONS) reported GDP increased by a mere 0.2 percent in the second quarter of 2011, following an increase of 0.5 percent in the first quarter of 2011.

The ONS said the weaker than expected growth was the result of a number of special events in the period; the additional April bank holiday; the royal wedding and the after-effects of the Japanese tsunami among them.

It suggested growth would have been far closer to 0.7 percent were it not for the combination of these particular events.

Elsewhere Robert Chote, chairman of the Office of Budgetary Responsibility (OBR) - the UK government’s fiscal watchdog - indicated to the Independent newspaper on Thursday that the government would miss its economic growth forecast for the year of 1.7 percent and suggested the OBR was about to lower its own forecast.

Chote told the newspaper: "Back in March our central forecast was for 1.7 percent growth this year, which at the time was fractionally more pessimistic than the average of the outside forecasters.

"Since then obviously we've had weaker out-turns in the first and second quarters than most people, including us, anticipated. For the second quarter the ONS [Office for National Statistics] explained a variety of one-off factors that contributed to that.

"As a simple matter of arithmetic, in order to get to 1.7 per cent now you'd be looking for quarter-on-quarter growth rates of 1 percent in the second and third quarters of 2011, and there aren't many people out there expecting that."

He added: "Looking forward to the next quarter, in the March forecast we had 0.5 percent for the third quarter. Now there are various indicators saying the third quarter will be relatively weak, but on the other hand there were special factors in the second quarter so there may be bounce-back there. There are potential pressures in both directions."

Earlier this year, analysts had confidently predicted the bank would increase interest rates by as early as March before revising that increase to August and then to November. Now few, if any, expect a rate rise before 2012.

While the global economic outlook and, in particular, the euro zone debt crisisis contributing to a confusing picture making predictions even harder to make, one economist told he expected all eyes to be watching for any indication from the bank that it would implement a second round of quantitative easing.

Next week the central bank will publish its latest quarterly inflation report which Peter Dixon, an economist at Commerzbank, told markets would be watching extremely closely for “a change in the BoE’s growth outlook for the remainder of the year and more importantly for next year. My own figures point to weaker growth in the UK and the rest of the world for next year than I had initially indicated.”

Anemic Growth

Dixon added the continued lack of consumer spending, fear over public spending cuts and the reduction in public sector jobs were all contributing to anemic growth in the UK economy.

But he said it was unlikely the BoE would act any earlier than November, suggesting it would rather adopt the same wait-and-see approach of the last few months and look to see whether growth showed any signs of improvement at the end of the third quarter.

However, George Buckley, chief UK economist at Deutsche Bank, said he expected a rate rise to occur no earlier than February 2012.

“When you look at the data, it turns out that the bank has altered interest rates seven times in February since the creation of the Monetary Policy Committee (MPC), and in general it changes rates more often in months when there is a quarterly inflation report than when there isn’t," he said.

Buckley added that he expected the bank to lower its GDP growth forecast slightly from its current position of 1 percent for the third quarter of the year, suggesting this figure was a little optimistic. But he added the Bank had got its forecasts right for most of the year, citing its GDP forecast of 0.3 percent for the second quarter as evidence.

He expects the bank to continue its wait-and-see policy until at least the start of November when he said stronger economic data as a result of a new calculation for measuring GDP growth or higher inflation or both might lead the bank to signal a tightening of monetary policy at the beginning of next year.

Last month’s minutes of the MPC meeting also revealed very little, with seven members of the committee voting in favor of holding rates at their current low and two voting for an increase of 0.25 percent in the base rate, much the same as in previous months.