The Bank of England kept interest rates at their record low on Thursday as policymakers wait to see whether a tumble in inflation is short-lived or turns into a bigger threat for the British economy.
In its last interest rate decision before a national election on May 7th, the Bank left its benchmark borrowing rate at 0.5 per cent, its level since the height of the global financial crisis in 2009.
Britain saw the fastest growth among major advanced economies last year and is expected to expand by as much as 3 per cent this year, despite a possibly weaker start to 2015. Pay growth is also starting to pick up.
But at the same time, inflation has fallen sharply on the back of the slump in global oil prices. It touched zero in February, easing pressure on the BoE to start weaning the economy off its very low borrowing costs.
All the Bank’s rate-setters have voted to keep rates on hold since the start of the year because of the inflation slump.
But its chief economist Andy Haldane surprised investors last month by saying a rate cut was just as probable as a rate hike because inflation might not rise as forecast over the coming months.
The BoE forecast in February that inflation would touch its 2 per cent target in two years’ time.
Mr Haldane's view has been challenged by other BoE officials. Governor Mark Carney and other rate-setters have said they expect the next move on interest rates will be a hike.
Economists polled by Reuters this month predicted a first rate increase by the BoE in early 2016.
The signs that the Bank remains in no hurry to raise rates helped push down the value of sterling against the dollar to its lowest level in five years last month.
Top officials at the Federal Reserve said on Wednesday that a US rate hike remained a possibility as soon as June, despite some weak economic data recently.
Investors are also waiting to see the outcome of Britain’s election which could produce no clear winner, according to opinion polls.
The BoE said on Thursday it was keeping unchanged at £375 billion the stockpile of government bonds that it acquired after the financial crisis as a further way to help support the British economy.
The Bank made no statement alongside its rate decision announcement. It is due to release minutes of the April meeting in just under two weeks’ time.