Bank of England to hold interest rates at record lows

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The Bank of England will hold interest rates at record lows once more today, amid speculation it will have to change the threshold for considering a hike in the cost of borrowing within months.

Economists predict that the strength of the economic recovery will see Bank governor Mark Carney lower the unemployment target under his forward guidance policy as soon as February to ensure rates remain at rock bottom.

Rates have been held at 0.5 per cent for nearly five years now and the Bank pledged last year not to consider a rise until the unemployment rate falls to 7 per cent, at the time predicting this would not be reached until 2016.

But unemployment has been falling sharply - down to a lower-than-expected 7.4% in October - as the recovery gains traction, meaning the threshold could be hit far sooner.

While the Bank is not expected to make any changes to its forward guidance policy at this month's meeting, it could reduce the unemployment target to 6.5 per cent in next month's inflation report, according to experts.

Alan Clarke of Scotiabank said unemployment was “falling like a stone”.

He added: “We think that 7 per cent will be hit in the early months of 2014. As a result, the Bank is likely to modify its forward guidance policy - lowering the threshold to 6.5 per cent - most likely at the February inflation report.”

Brian Hilliard at Societe Generale said the threshold could “easily” be reduced below 6.5 per cent.

Despite the Bank's assurances that rates will stay low for some time, the recent pace of recovery has fuelled fears that borrowing costs will have to rise soon.

Economists are forecasting that fourth quarter 2013 gross domestic product growth at least matched the 0.8 per cent recorded in the previous three months.

Closely-watched survey figures from the services, manufacturing and construction sectors have confirmed that despite a dip in activity last month, the economy enjoyed a strong end to 2014.

But the economy still has some way to go before recovering to pre-financial crisis levels.

Mr Hilliard said the Bank's monetary policy committee (MPC) is not “anywhere near ready to raise rates, given the general state of the economy” and believes rates will remain on hold until the third quarter of 2015.

The recent strength of the pound is also thought likely to increase chances that rates will remain on hold, as it could weigh down on exports by making products more expensive for overseas buyers and damage efforts to rebalance the economy.

Howard Archer, chief economist at IHS Global Insight, said: “Any near-term raising of interest rates could cause sterling to strengthen even more with damaging repercussions for export prospects.

“Sterling's strength should help to contain consumer price inflation over the coming months and give inflation a good chance of staying close to its 2 per cent target level for an extended period after dipping to a four-year low of 2.1 per cent in November.”

PA