vallierojas: Interest rates: what the experts say

City economists are split over when UK interest rates will rise, after the Bank of England left borrowing costs unchanged again

Nida Ali, economic advisor to the Ernst & Young Item Club

Disappointing Q1 GDP growth coupled with March's sharp fall in inflation meant that there was little chance of the MPC increasing interest rates today. Indeed, the growth outlook has become increasingly uncertain in light of this week's more subdued PMI surveys which point to meagre GDP growth in the second quarter as well. Given the weak growth backdrop, we could as easily see some of the more hawkish members move back towards the middle ground, as see those in the middle start voting for higher rates.

While high inflation is definitely a cause for concern, it is largely a result of temporary factors such as the increase in VAT and surging commodity prices. Indeed, inflation is likely to rise in the next few months as the effects of higher commodity prices continue to feed through the supply chain. But the monetary policy committee's (MPC) job is to target inflation in two years' time and by then these temporary pressures will not be an issue.

The MPC's greatest fear is that the recent high rates of inflation will kick off a wage-price spiral, but the chances of this are low given the degree of spare capacity in the labour market. We expect inflation to come back to the 2% target of its own accord in 2012, without the need for a rate increase, and it's likely that the fan charts in next week's inflation report will show a similar picture.

We remain of the view that downside risks to growth ? and therefore inflation ? clearly dominate the upside risks and that rates should remain on hold for some time to come, possibly even into next year.

Ian McCafferty, CBI chief economic adviser

Given the recent mixed signals about the current strength of the economy, it is not surprising that MPC members have decided to keep interest rates on hold again.

While the recovery continues to make progress, recent economic data show that it is very patchy across sectors, and some parts of the economy remain fragile. However, pipeline inflationary pressures have intensified, with our economic surveys showing rapid cost inflation from increased energy and commodity prices. Our view remains that the Bank is likely to move away from the emergency 0.5% rate later this year.

Vicky Pryce, senior managing director at FTI Consulting

Today was Andrew Sentance's final meeting as an external member of the MPC. Over the past few months, Andrew has been the committee member most concerned about inflation risks and he was the first to vote for an increase in interest rates. Yet the irony is that, throughout his three-year term, the Bank never raised interest rates.

It is understandable that Andrew and other MPC members have become increasingly concerned about inflation, which currently stands at 4%, compared to its target value of 2%, especially when some forecasters expect it to reach 5% this year. However, the MPC as a whole have made the right judgment by keeping interest rates low for now.

There are three reasons for not increasing interest rates. The first is that much of the current inflation arises from factors that we expect to be one-offs, such as tax rises and increases in commodity prices as a result of current global uncertainties. These factors push up the price level ? and are one reason why household disposable incomes are falling ? but they should not lead to permanently higher inflation.

The second reason is that the economic recovery is still weak. The preliminary Q1 GDP estimates released last month imply that ? correcting for weather-related effects ? the economy did not grow during the last quarter of 2010 and the first quarter of 2011. This means there is still a lot of spare capacity in the economy, including 2.5 million unemployed, to act as a brake on attempts by workers to push up their wages or by businesses to increase their profit margins.

The third reason is that April 2011 was the start of the implementation of the �81bn cuts in public spending and the �30bn increases in overall taxation, which are planned for the next four years. In many cases, these are frontloaded, something which the IMF has just praised the UK government for. This is therefore no time to compound the misery of cuts and fiscal restraint with a monetary tightening that will disproportionately affect consumer confidence and household disposable income at a time of fragile economic conditions.

Aidan Manktelow, economist at the Economist Intelligence Unit

There had been a sense that momentum was building towards a rate rise this month, because of the threat from high inflation to the Bank's credibility. But a raft of weak economic data in the past month has put paid to that.

The Economist Intelligence Unit does not expect the Bank to raise rates until late in 2011, with the policy rate ending the year at 1%. The pace and scale of fiscal austerity implies that any monetary policy tightening will be gradual, although we expect the Bank to raise interest rates before reversing QE.

Philip Shaw of Investec

For now, we still view an August hike to be the most likely outturn. However, we will be tempted to push this back to November or beyond, should the run of activity data continue to disappoint, or indeed if the tone of next week's inflation report is more dovish than we expect.

Hetal Mehta of Daiwa Capital Markets Europe

The slew of disappointing data over the past few weeks ensured that any lingering chance of a hike today had evaporated. Although high near-term inflation is clearly concerning for the Bank of England, 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. And with economic growth set to be subdued, unemployment likely to rise further, continued weakness in credit growth, and stringent fiscal consolidation yet to bite, the majority on the MPC will be in no hurry to tighten monetary policy.

As such, our view is that the first rate increase will be pushed back, most probably to early next year.

Howard Archer of IHS Global Insight

The Bank of England's decision to keep interest rates down at 0.5% reflects serious concerns and uncertainties over the state of the economy and its ability to withstand the fiscal squeeze that has increasingly kicked in from early April. Indeed, a flurry of disappointing data and surveys has likely heightened the MPC's concerns over the economy, particularly the tepid GDP growth in the first quarter of 2011 following contraction in the fourth quarter of 2010.

At the same time, an easing back in consumer price inflation to 4.0% in March from 4.4% in February and ongoing muted earnings growth have eased pressure for an immediate interest rate hike. Also crucially, ongoing muted pay fuels belief that a damaging wages-prices upward spiral will develop, and supports the view that consumer price inflation will fall back markedly once the upward pressures from VAT changes, higher oil and commodity prices, and sterling's past weakness, wane.

It will be very interesting to see when the minutes of the meeting are published whether or not the MPC were more dovish in view of the recent largely disappointing news on the economy. Martin Weale, who has been voting for an interest rate hike since January, admitted recently that the economy had been softer than he expected.

Also significantly, the dynamics with the MPC could now change significantly, as the arch-hawk Andrew Sentance is leaving. Of course, it remains to be seen what stance his successor Ben Broadbent takes, but it seems unlikely that he will be as hawkish as Sentance has been.

We expect the Bank of England to delay raising interest rates from 0.50% to 0.75% until November, and it is far from inconceivable that it could hold fire until 2012. This reflects our belief that growth will be muted during much of 2011 and that a soft labour market will prevent higher inflation expectations feeding through to lift wage growth significantly. We believe that most of the MPC will remain cautious over lifting interest rates given that the fiscal squeeze is kicking in now.

Even if interest rates do rise in the near term, the probability remains that they will move up relatively gradually and stay very low compared to past norms. We see interest rates only rising to 2.00% by the end of 2012. Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze. In addition, we believe that inflation will fall back markedly later on in 2011 and 2012 as relatively modest, below-trend growth and elevated unemployment limits underlying inflationary pressures. In particular, ongoing substantial pressures on consumers are likely to limit both growth and inflation.

Jonathan Samuels, chief executive of Dragonfly Property Finance

Aside from the fact that inflation has fallen and the economy, at best, is flatlining, the majority of the MPC instinctively understands that raising rates at the current time could send delicate consumer confidence into freefall.

People's disposable incomes are already in reverse but to squeeze their finances further through increased mortgage payments could be the coup de grace for both confidence and the economy.

The moment people feel the roof over their head is under threat, they stop spending full stop. This is exactly the effect raising interest rates would have for a large part of the population, especially those stranded on SVRs with no hope of remortgaging.

The MPC is acutely aware that confidence is crucial to any sustainable recovery in the economy. It knows that a rate rise, particularly after such a prolonged period, would be quite a shock. Even a symbolic rise of 25 basis points to stipulate that rates can't stay low forever could see confidence and the economy tank.

Given the anaemic recovery and consumer nerves, it could realistically be 2012 before we see interest rates finally rise.

David Kerns, private client dealing manager at Moneycorp

As expected, interest rates have been kept on hold, due to the current weakness of the overall UK economy. Consequently, the pound remains depressed against the euro, hovering at the 1.11 level, and until we see any indication of improving economic conditions in the UK, any interest rate hikes will be delayed, possibly even until 2012.