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Export drag from strong pound means rate rise unlikely

The Monetary Policy Committee (MPC) of the Bank of England voted to keep the base rate unchanged at 0.5% last week, as widely expected. The base rate has stood at this level for over six years now, and with inflation at its lowest level for fifty years rates are unlikely to rise before the end of 2015, according to the Centre for Economic and Business Research (CEBR).

CEBR states: ‘Currently there is nothing compelling the Bank to raise its base interest rate. Inflation on the latest reading dipped below zero to -0.1% in April. The ‘core inflation’ measure is also far below the Bank’s 2% target at 0.8%. This suggests demand is simply not high enough to justify applying the brake of a rate rise.

‘If anything, Bank Governor Mark Carney is under pressure to move rates in the other direction. Since mid-2014 most central banks have loosened monetary policy as inflation became less of a risk while global growth stuttered. Major economies’ currencies (except for the dollar) have become cheaper and so their exports more competitive than the UK. The trend put all central banks under pressure to follow suit, with the UK now an outlier. Carney has tried to dent the pound’s strength in March by stressing that rates could stay low for some time, but after a brief fall, sterling remains problematically high.’

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