Bank of England to keep interest rates at 0.25% despite higher inflation forecast

Updated: 

The Bank of England is expected to keep interest rates on hold next week, with new voting member and deputy governor Dave Ramsden unlikely to "rock the boat" despite forecasts of a further rise in inflation.

Economists predict the Bank's Monetary Policy Committee (MPC) will hold rates at 0.25% as dovish members of the Monetary Policy Committee (MPC) continue to outnumber those calling for a hike, even as consumer prices push further past the Bank's 2% inflation target.

"It looks a nailed-on certainty that the Bank of England will keep interest rates at 0.25% on Thursday after the September Monetary Policy Committee meeting,"  Howard Archer, chief economic adviser at the EY ITEM Club, said.

"Furthermore, the case for an interest rate hike anytime soon currently looks pretty flimsy overall to us although sterling's recent overall slippage may well be of some concern to the Bank."

While MPC members Ian McCafferty and Michael Saunders are expected to vote for an increase, Mr Ramsden is likely to side with Governor Mark Carney and and deputy governor Ben Broadbent, who have been more cautious about unwinding the Bank's post-Brexit vote stimulus measures.

A senior civil servant and Treasury veteran, Mr Ramsden was appointed as the new deputy governor for markets and banking in July following the departure of Charlotte Hogg.

Ben Broadbent and Mark Carney at press conference
Dave Ramsden is expected to side with Governor Mark Carney and deputy Ben Broadbent in voting to keep interest rates on hold (PA)

"Speculation around the time of Ramsden's appointment suggested that he would be a dove, since his writings concerning the Brexit process were somewhat downbeat," Alan Clarke, head of European fixed income strategy at Scotiabank, said.

"While new external MPC members have had a tendency to surprise, Ramsden is an internal, deputy governor, so we doubt that he will rock the boat at this stage."

Thursday's meeting will be preceded by data from the Office for National Statistics (ONS) on Tuesday, which economists expect will show the Consumer Price Index (CPI) measure of inflation rising from 2.6% to 2.8% in August, as the effects of the Brexit-hit pound continue to be passed on to shoppers.

That would bring inflation back near its four-year high of 2.9% which was hit in May, further past the Bank's target.

The Bank is currently predicting that CPI will peak at close to 3% in October, with Governor Carney warning last month that pressure on families would continue for the next few quarters.

However, he said that wages would start to outpace inflation next year and that interest rates are likely to begin to rise as the economic outlook improves.

A wallet full of money
Higher inflation and sluggish wage growth have weighed on spending power (PA)

But economists suspect interest rates could stay lower for longer.

Mr Archer said: "We believe it is highly unlikely that the Bank of England will raise interest rates any time soon, with growth likely to remain lacklustre over the rest of 2017 and with inflation likely to fall back appreciably in 2018 after peaking around 3% in the latter months of 2017.

"We have pencilled in one interest rate hike to 0.50% late on in 2018, but this is far from certain.

"It is partly based on the assumption that there will eventually be an agreement on a Brexit transition period that helps the economy improve later on in 2018.

"We certainly would not be surprised if interest rates remained at 0.25% going into 2019."