The Bank of England has decided to keep its key repo rate unchanged at 4.50 pct for the sixth month running.
The decision from the rate-setting Monetary Policy Committee came as no surprise and there was no statement accompanying the decision. The minutes to today's minutes will be published on Wednesday, Feb 22.
At the last two previous meetings, Steve Nickell, one of the four external members on the committee, was the only one to vote for a cut. He concluded that there was a case for an immediate cut given the modest degree of spare capacity in the economy and argued that the inflation risks from oil and gas costs and from the current wage round, may have been overplayed.
However, the other eight members on the committee, including the BoE's governor Mervyn King, argued the case for a wait-and-see approach, and noted the pick-up in euro zone demand and relatively strong consumption news as well as the continued march higher in financial markets.
This month's rate-setting meeting comes ahead of the quarterly Inflation Report, which is due to be published next Wednesday. In its last set of projections in November, the BoE predicted that CPI inflation would be close to the 2.0 pct target two years or so ahead, while growth would head back towards trend. "The question is whether the new forecast sticks to the previous projection of robust growth and at/above-target inflation or whether some of the downside risks get incorporated into the central projection," said Royal Bank of Scotland economist Geoff Dicks. "If the latter there might be a shift in the body of the MPC behind a rate cut," added Dicks.
Given this uncertainty, it's not surprising that the forecasting community is somewhat divided about what the MPC will do this year, though there is a clear majority predicting lower borrowing costs over the next 12 months.
Most think that interest rates have further to fall, possibly down to as low as 3.75 pct, as economic growth disappoints and inflationary pressures ease in the wake of subdued activity levels and a sustained decline in oil prices. "We remain comfortable with our view that interest rates will fall further this year as output remains below trend and inflation falls back below its target," said Jonathan Loynes, chief European economist at Capital Economics.
Other economists though, think the central bank may tweak up interest rates over the coming year, but not by much, as economic growth comes back towards the trend rate, thought to be around 2.50 pct a year. They noted that the first estimate of fourth-quarter GDP growth was stronger than anticipated as a result of a solid recovery in the services sector, particularly on the high street. GDP grew by the long-run average of a quarterly 0.6 pct for the first time in a year.