Interest rates: what the experts say

The Bank of England left interest rates unchanged at 0.5% on Thursday, as expected. Here is what City economists and housing experts made of the decision. Neil Chegwidden at Jones Lang LaSalle Confirmation that the base rate is to remain at its historic low of 0.5% will be welcomed by the housing industry even though no other verdict was really a possibility. The decision however will do little to lift the mood in the national housing market but will help it to tread water. The UK housing market has weakened since last autumn but has probably proved a little more resilient than many had expected during the first few months of 2011. London is bucking the national trend in prices but all regions of the UK are suffering from an even further decline in transactions. The key mood-enhancing trends that the housing industry will be watching for are a pick up in transactions, a rise in mortgage lending and a boost in first time buyers. News that visitor numbers at new homes sales sites have increased during the first few months of 2011 is one positive sign, but whether these other indicators can follow suit is more questionable. Fionnuala Earley, UK consumer economist at RBS The personnel changed on the monetary policy committee this month, but that was all. It wasn't a surprise that the Bank Rate stayed put. Economic conditions haven't got any better in the last month and the analysis behind the IMF's endorsement of the Government's austerity regime suggests that monetary policy needs to remain supportive for the time being. Rates will have to rise though, and I think this will happen before the end of the year. James Knightley, UK economist, ING No surprise given the recent run of soft activity data and worries about the momentum of the global recovery. Consequently the market has pushed back its expectations for the timing of the first UK rate hike to March next year. However, with inflation likely to move above 5% in the next three to four months on the back of rising utility bills and food prices and with employment and employment intentions surveys remaining firm, we feel that the balance of probabilities favours an earlier move. Indeed, we believe the timing of the Easter/Royal Wedding/May day holiday period has distorted the recent data flow and we expect to see some improvement in the numbers over coming months. The fact Andrew Sentance has left the MPC suggests the vote was more likely to be 7-2 in favour of no change to rate today, but on balance we still favour a November rate hike. Policy tightening is likely to be very gradual though given significant domestic and international uncertainties, with rates rising in 25bp per quarter stages thereafter. Philip Rush, UK economist, Nomura We continue to expect a rate hike in August, but see this as a very close call as the MPC is wavering in the face of uncertainty. But the underlying picture is much better than simplistic headlines suggest and the MPC has acknowledged this. If our forecast for second-quarter GDP growth of 0.8% q-o-q is realised, concerns over winter weakness should subside, bringing a rate hike back on to the agenda. In May, the Bank saw a rate hike in the second half of 2011 as consistent with balancing the risks around its target in the medium term and this assumed growth nearer to half this pace. Markets are not pricing the first rate hike from the Bank of England until well into 2012. Much of the bid has been attributed to global factors, partly related to supply-chain disruptions from Japan and bad weather in the US, which we do not think will persist as long as the market currently seems to expect. The optimal timing to instigate contrarian trades is not immediately obvious. However, we do think that the risk reward is good here. The minutes of this meeting will be published on 22 June. We expect there to have been no change in the votes of existing members at this meeting, though the departure of Dr Sentance means that the dissenters will lose their most outspoken member. Although we think his replacement, Ben Broadbent, is likely to take roost at the hawkish end of the committee, we do not think he will fly that way at his first meeting. Hetal Mehta, UK economist, Daiwa Capital Markets The past few weeks have seen a raft of disappointing data pointing to a subdued economy, and markets have significantly pushed back their expectations for the first interest rate hike well into next year, which seems to us entirely rational. Interest rates have now been at 0.5% for over two years, while the stock of asset purchases has remained at £200bn for more than a year. Although near-term inflation is still a concern for the Bank as commodity price increases continue to feed through, once the increase in VAT and high commodity prices fall out of the annual calculations, it is likely to drop close to the 2% target next year. As such, we maintain our view that the first rate increase will come in early-2012 at the earliest. Alan Clarke, UK economist, Scotia Bank Since May, the domestic economic data have been pretty disappointing – especially the forward looking surveys. Furthermore, there have been signs of softening in activity in the UK's main trading partners – the US and eurozone. Against this background, the BoE is likely to leave Bank Rate on hold for the foreseeable future – most likely right through to the end of 2011, and plausibly well into 2012. The next focus of attention will be the MPC minutes on Wednesday 22 June. Clearly, arch-hawk Andrew Sentance is no longer there to dissent in favour of higher rates. Recent MPC minutes have shown a slightly less hawkish tone. In tandem with the softening in recent economic data, there is a good chance that at some point the other dissenters in favour of higher rates fall back in line with the majority. For now, with the Bank's inflation projections highlighting a significant chance that inflation will overshoot target at the 2-year ahead horizon there is still a case for Martin Weale and Spencer Dale to stick to their guns and vote for a rate hike. I suspect that the vote at this meeting will be 7/2, though I would not fall off my chair in surprise if the vote turned to 8/1 or even 9/0.