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Why Bank of England is likely to hold interest rates

UK interest rates are expected to stay low for some time to come (Getty)

Americans were told last week that their cost of borrowing will rise for the seventh time since 2015 But, in the UK, borrowers are again expected to avoid a rise in interest rates when the Bank of England announces the outcome of its rate-setting meeting on Thursday.

UK interest rates are expected to be held to at 0.5%. Analysts at Hargreaves Lansdown say that tougher economic data means the market is not anticipating a rate rise until August.

In November, when the Bank’s Monetary Policy Committee voted to unwind the cut to 0.25% that took place after the EU referendum, the market had been expecting that rates would have risen by now.

But Laith Khalaf, senior analyst at Hargreaves Lansdown, said a June rate rise was unlikely, pricing in a 50-50 chance in August and chances of a rise by the end of the year at 67%.

“And it wouldn’t be entirely surprising to get to the end of the year without a rate rise. It is a sign of poor confidence in the UK economy,” said Khalaf, and contrasts the situation in the US where the Federal Reserve last week not only pushed up rates but signalled two more hikes this year.

The European Central Bank, which sets interest rate for the eurozone, also signalled that rate rises were unlikely before September 2019, but announced it would scale back the bond-buying programme it has embarked upon since the financial crisis.

Further rate rises in the UK , where the central bank has a mandate to keep inflation at 2%, are being held back by a number of factors.

Khalaf cited the latest GDP data for the first three months of the year showing growth of 0.1% – albeit possibly constrained by a blip caused by the cold weather at the start of the year – the slow rate of wage growth and the “existential state of angst” in the retail sector.

Hardly a day goes by without a retailer reporting problems. Last week department store chain House of Fraser announced it would shut 31 of its 59 shops while earlier this week discount retailer Poundworld entered administration.

Economists at ING see the challenges facing the retail sector as one of the main factors that could deter a rate rise in August.

“While our base case is for the Bank of England to hike rates in August, the challenges facing the retail sector are probably the biggest risk to this view,” said the Dutch bank’s economist James Smith in a research note. 2018 so far has been one of the toughest years for retailers since the financial crisis, he said. While retail sales rose a sharper than expected 1.3% in May, analysts believe it was largely the result of the better weather that month and the Royal Wedding.

Smith told Yahoo Finance that if rates were not increased by a quarter point in August it would be “quite a long time” before they moved because of the uncertainties created by Brexit, due to take place in March 2019.

Aside from the post-referendum cut, rates in the UK have been at 0.5% since the financial crisis. In November, when the rate was lifted to 0.5%, the Bank of England found that 2 million households with mortgages – a fifth of those with a home loan – would never have experienced a rise in the bank rate since taking out their loan. It calculated that a quarter point rise in interest rates increases monthly payments on an average mortgage of £15 a month.

Charities are concerned too. In November, StepChange warned of the impact for households which are “just holding on by their finger tips”. One in 10 of its clients with a mortgage would end up with a budget deficit after a rate rise.

Savers also have little to cheer about. Helen Saxon, chief product analyst at MoneySavingExpert.com said: “On 2 November when the MPC decided to raise interest rates, the top easy access account paid 1.3% in interest. This week, the top easy access account also paid 1.3% in interest to savers – it’s fair to say that the rise back to a 0.5% base rate didn’t really have too much effect.

“In fixed savings, however, we have seen a small rise – for example a one year fix today could get you 2.05%, compared with 1.85% in November – though this is an outlier; the next best one-year fix pays 1.87%.

“Overall, it remains a dismal picture for savers wanting a return on their cash.”