Skip to main content

The Anglo File: Bank of England Likely to Leave Rates Steady, for Now

Analysts say inflation concerns are building, and it's only a matter of time before rates rise.
  • Author:
  • Publish date:

If you've been thinking about buying a new flat in London, now may be the time to lock in that mortgage.

The benchmark U.K. interest rate now stands at 5%, its lowest level since 1994. Over the past 10 months British monetary authorities have hacked rates seven times for a total of 250 basis points. The days of lower interest rates, however, may be numbered.

While it remains improbable the

Bank of England

will raise interest rates when it finishes its monthly two-day meeting Thursday, recent economic data have likely given its

Monetary Policy Council

, or MPC, more reason than ever to consider hike before the year is out.

A move to raise rates would place the Bank of England at the vanguard of world monetary authorities expected to increase borrowing costs in the coming months. The

Federal Reserve

has made clear it may feel the need to follow up on its June 30 rate hike, and the

European Central Bank

hinted in July at a tightening bias for the euro zone. A nascent recovery in Japan suggests authorities there may also have to raise rates.

U.K. Rates
After seven cuts in 10 months,
U.K. interest rates may be poised to rise.

Source: Bank of England

At the beginning of 1999, it appeared the robust U.K. economy might be headed for a hard landing and even possibly recession. That never happened, however, as stronger-than-expected figures for second-quarter gross domestic product showed last Friday.


Office of National Statistics

said the economy grew by 0.5% in the second quarter compared with the first three months of the year and by 1.2% vs. the same quarter last year. Figures for first-quarter GDP were also revised to show 0.1% growth instead of no growth. The government expects the economy to grow between 1% and 1.5% this year.

Other data from the past week also suggest the bottom of the growth cycle has been reached. July's

Purchasing Managers Index

rose to its highest level since April 1998 and a July

housing price index

rose to a 2 1/2-year high.

While all that might suggest the BOE may want to hike, analysts caution that central bankers have a limited mandate. They're charged only with meeting the government's inflation target of 2.5%. As long as they meet it -- and it's been hanging just above 2% for the past few months -- Governor Eddie George and the rest of the MPC don't have to pull the trigger.

"It's quite likely the bank will remain on hold at this week's meeting," says Mark Miller, an economist for

Morgan Stanley Dean Witter

in London. But "risks to the bank's inflation target are really building on the upside and it's only a question of time before they hike -- probably some time around autumn."

While unemployment, which is expected to remain firmly below 5%, may begin to push wages higher, the strength of the pound will also determine if inflation stays checked or not.

Sterling's strength has in part kept the cost of imports down, but "the currency has been a wild card. The bank will keep a close eye on it and could use it as the primary reason whether or not to keep rates on hold," says Miller.

To what extent inflationary pressures actually remain subdued will be revealed next week -- after the MPC has made its rate decision. On Aug. 11, a day that coincidentally will see much of Europe plunged into darkness during the century's last total solar eclipse, the BOE will release its next inflation report, which market participants hope will shed light on the direction of interest rates over the next couple of months.

That report, more than GDP figures or the purchasers index, will give the clearest indication of where Eddie George and his friends will be taking the cost of a UK mortgage this autumn.