Bank of England policymakers and members of the Monetary Policy Committee (MPC) were questioned by the Treasury Committee today on the state of the economy. When pushed on interest rates, it emerged there was an even split among the central bank’s team. Last month, four of the BoEs policymakers believed the minimum conditions needed for considering an interest rate hike had been met, while four thought the recovery was not strong enough.
As the UK continued to move beyond the pandemic, further economic gains could be on the horizon, which could mean the next vote could skew towards raising rates.
Felicity Buchan, the Conservative MP for Kensington, brought up interest rates today in the meeting.
Ms Buchan said: “In our discussion on forward guidance and whether the threshold [for raising rates] had been met, you kindly gave us the information it was four to four…
“…Do you mind telling us where you stand [today]?”
Andrew Bailey, the Governor of the Bank of England, responded: “I think we can do that.
“So my view was that the guidance had been met.”
The next decision on the base rate will be made on September 23.
On top of interest rate decisions, the BoE also has a current inflation target of two percent.
It is also engaging with £895billion of quantitative easing, made up of £875billion in gilts and £20billion in corporate bonds.
In a summary of its August Monetary Policy Report, the BoE provided the following commentary on the economy: “Vaccines are helping spending, jobs and incomes recover from the effects of Covid. The size of the UK economy is getting close to where it was before the pandemic. Unemployment is falling, although the number of people in work is lower than it was before the pandemic.
“Inflation (the pace of price rises) has risen above our two percent target. Prices rose by 2.5 percent between June last year, when prices were low because of Covid, and June this year.
“We expect inflation to rise further in the coming months. As countries around the world have reopened, demand for some goods and services increased sharply. Some businesses have struggled to meet this extra demand, because of things like shortages of materials used in production. That pushes up costs and prices.
“We expect above-target inflation to be temporary. We don’t think that demand will continue to rise as fast, and some of the shortages that are currently making it difficult for businesses to produce their products should ease. We expect inflation to fall back, reaching our target in around two years’ time.
“Our job is to ensure that inflation returns to our target sustainably. In response to the Covid pandemic, we have been supporting households and businesses through low interest rates and quantitative easing. This keeps the cost of borrowing low.
“To support the recovery and ensure that inflation stays close to our two percent target in the medium term we have kept our interest rate at 0.1 percent, and the amount of quantitative easing at £895 billion.”
Savers have had to deal with low interest rates for a long time and recently, it emerged the effective interest rate paid on individuals’ new time deposits with banks decreased by two whole basis points to 0.29 percent.
Additionally, the effective rates on the outstanding stock of time deposit dropped to 0.38 percent, whilst sight deposit rates remained at 0.10 percent.
In early September, Moneyfacts.co.uk also warned there are no standard savings accounts that can beat inflation.
Rachel Springall, Finance Expert at Moneyfacts.co.uk, commented: “There has been a notable uplift to market-leading savings rates on offer since last month across various types of accounts and terms, which is positive to see. However, inflation is eating its way into savers’ hard-earned cash and with the expectation for it to rise, its eroding power will not be easing any time soon.
“Savers would be wise to not let this deter them from finding a more attractive rate, as deals are improving, and they may miss out on a market-leading rate if they become apathetic.”