Bank of England expected to hold key rate

Expectations of a hike have been pushed back into next year with Consumer Price Index (CPI) inflation currently at zero and predicted to turn negative.

Rate-setters are also likely to be concerned by uncertainty ahead of next month’s poll as well as the performance of the wider economy despite recent figures showing growth of 2.8% last year, better than previously thought.

Other data has been mixed. Purchasing managers’ index (PMI) surveys this week indicated accelerating growth in manufacturing and services sectors last month, but construction losing momentum.

Overall the PMI figures pointed to growth picking up to 0.7% for the first quarter, up from 0.6% in the last three month of last year.

However official figures for January have been less rosy with all three main sectors – including the powerhouse services sector which represents three-quarters of output – going backwards.

Meanwhile, hopes for a pick-up in pay growth have suffered a setback as wage growth has stalled.

Bank of England policy makers must try to avoid knocking the recovery off course with any rate hike as well as trying to bring inflation back up to its 2% target.

Chief economist Andy Haldane has even suggested that a rate cut is as likely as a rise, though subsequent remarks from the other members of the nine-strong Monetary Policy Committee (MPC) indicate he is in the minority.

The MPC has made clear that rates could be reduced should low CPI persist longer than expected but a number of policy makers have stressed that they still see the next move as a rise.

Rates have been held at 0.5% for six years since the height of the financial crisis and the recovery has spurred speculation about when a first hike will come.

But policy makers, who are typically faced with the prospect of having to lift rates to keep inflation down, now look as though they will need to keep them low for longer to ward off the threat of a damaging spiral of low or negative CPI.

Low inflation, driven by temporary factors such as the slide in oil prices, is for the moment seen as broadly positive by politicians and officials, because it gives consumers more spending power to boost the economy.

Retail sales figures for February showed a steeper than expected rise of 0.7% as shoppers appeared to be spending the windfall from lower food and petrol prices.

But there is a fear that if negative inflation becomes entrenched, consumers could delay spending and firms put off investment.

In addition, servicing repayments on debts such as mortgages would become more expensive in real terms, especially if wages fall.

Bank of England governor Mark Carney has described the threat of this as a “clear and present danger” to the UK’s debt-laden households and businesses.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: “We think that the deflation likely to be seen in the coming months will be of the ’good’ sort, lasting only a short while and boosting households’ spending power.

“So we doubt that a rate cut – as floated by MPC member Andy Haldane – will be seen.

“That said, a rate rise seems unlikely until the Committee is sure that deflation is not becoming entrenched, which may take several months.”