Sept. 4 (Bloomberg) -- The Bank of England kept its key interest rate at a record-low today after persistent weakness in inflation and wage growth reinforced the case for keeping emergency stimulus.
The Monetary Policy Committee’s decision also came against a backdrop of a weakening euro-region economy and tensions with Russia over Ukraine. It was the last before Scotland holds an independence referendum that threatens to break the U.K. apart.
While the MPC split last month, with two of the nine members voting to increase the rate by 25 basis points from 0.5 percent, others led by Governor Mark Carney said economic circumstances didn’t justify such a move. They cited the potential for economic “shocks” from a premature tightening.
“Wage growth remains virtually non-existent and inflation is below target,” said James Knightley, an economist at ING Bank in London. “The euro-zone newsflow hasn’t been particularly encouraging either with surveys suggesting economic stagnation.”
The gloomy euro-area outlook prompted the European Central Bank to unexpectedly cut its benchmark interest rate to 0.05 percent from 0.15 percent today. It also lowered the deposit rate by 10 basis points to minus 0.2 percent.
A reduction in the benchmark rate was predicted by just six of 57 economists in a Bloomberg survey. The euro weakened after the ECB announcement. The currency of the 18-nation bloc was at 79.40 pence as of 12:51 p.m. London time, down 0.6 percent from yesterday.
The BOE decision was correctly forecast by all 49 economists in a survey. The MPC also kept its quantitative-easing program on hold.
The BOE said it will reinvest 14.4 billion pounds ($23.7 billion) of gilts purchased through QE that are scheduled to mature on Sept. 7. The operations will be held the weeks starting Sept. 8, Sept. 29 and Oct. 6.
Martin Weale and Ian McCafferty voted for a rate increase in August, saying there are signs wages are set to pick up and that early action would enable the MPC to fulfill its plan for “gradual” tightening.
Economists in a Bloomberg survey forecast a rate increase in the first quarter of next year. Sonia contracts show traders are betting the BOE will refrain from raising until May.
The MPC meeting came two weeks before Scotland holds a referendum on whether to end three centuries of union with the U.K. Nationalists are gaining ground before the Sept. 18 vote, and victory for the Yes campaign could deliver a shock to the British economy that would reinforce the case for keeping rates on hold.
Markets are already showing jitters, with the pound at its lowest against the dollar since February and volatility jumping by the most in almost six years this week. Ten-year gilts yield the most relative to equivalent German bunds since 1997.
Britain’s economy has grown 0.8 percent in each of the past two quarters and is on course to be the best performer in the Group of Seven this year.
Nevertheless, Carney says weak wages and a lack of inflation pressures weigh against a policy change now. Consumer-price growth slowed to 1.6 percent in July, its seventh month below the 2 percent target. BOE forecasts show the pace of economic growth will cool.
Evidence of a slowdown is already emerging. An index of factory growth fell to the lowest level in more than a year in August. While services strengthened, there were signs of weakness, with new orders and confidence among firms slipping.
Kevin Daly, an economist at Goldman Sachs Group Inc. in London, said he expects the first rate increase in the first quarter of next year.
“We no longer view the risks around this forecast as being tilted towards an earlier rate rise,” he said in a note. “How wages and unit labor costs evolve over the next six months will continue to play the key role in shaping that view and the risks around it.”
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