Chancellor of the Exchequer George Osborne is sticking to his plan to leave the heavy lifting on Britain's economy to Mark Carney.
Osborne's pledge to continue tackling the budget deficit means the onus remains on the Bank of England (BoE) governor and his colleagues to drive economic growth. Tight government purse strings, along with the shackles of a struggling Euro area, spurred the Monetary Policy Committee (MPC) to keep the key interest rate at a record-low 0.5 per cent on Thursday.
With a general election in five months, Osborne is looking to entice voters with his approach to fiscal responsibility, while the MPC has highlighted the drag from deficit-reduction plans.
Also at the forefront of Carney's concerns is the weakness in the Euro area, where European Central Bank policy makers led by Mario Draghi are debating if they need to pump even more stimulus into the economy.
There is a "combination of political risk weighing on growth, fiscal tightening, headwinds from abroad, weak wage growth and very low inflation," said Elizabeth Martins, an economist at HSBC Holdings Plc in London.
That "will be enough to keep rates on hold for another year". The BoE's decision was forecast by all 50 economists in a Bloomberg News survey.
The ECB's Governing Council, which met in Frankfurt on Thursday, kept its benchmark rate unchanged at a record-low 0.05 per cent.
The pound stayed lower against the dollar after the BOE announcement and traded at $1.5656 as of 1:20 p.m. in London, down 0.2 per cent from Wednesday.
Economists in Bloomberg 's monthly survey expect the BoE to keep the key rate unchanged until at least the second quarter, while Sonia forwards are only fully pricing in a quarter-point increase by the end of next year.
While Britain's economy has grown for seven straight quarters and unemployment has fallen, Carney has highlighted the risks from overseas. That was echoed by Osborne in his end-of- year statement to parliament on Wednesday, when he said "warning lights are flashing over the global economy".
In addition to global pressures, UK growth is being restrained as sluggish wage growth undermines spending at home.
At their November policy meeting, officials said there was a question whether private domestic spending would remain strong enough "to offset the contractionary influences of the fiscal consolidation and subdued external demand".
In his Autumn Statement, Osborne offered pre-election sweeteners such as a revamp of the tax on buying houses and higher levies on multinational companies, though he had little room for maneuver. The budget deficit is forecast to be 5 per cent of output this year.
"The fiscal numbers aren't doing an awful lot to stimulate the economy," said Peter Dixon, an economist at Commerzbank AG in London. "The MPC will have to do a lot of work." The UK economy will grow 3.5 per cent this year and 2.9 per cent in 2015, according to the BoE. At the same time, a drop in commodity prices and low inflation are easing a squeeze on consumers and may support spending. Recent surveys by Markit Economics have indicated continued momentum, and house prices are still rising, albeit at a more moderate pace.
The minutes of the MPC's November meeting showed Martin Weale and Ian McCafferty kept up a call for a 25 basis-point increase because of the threat to prices from a strengthening labour market. In addition, cracks developed among the seven- strong majority resisting that call, with some raising concerns about potential inflation pressures.
The first increase in interest rates could come sooner than investors expect, according to ING Financial Markets economist James Knightley in London. He predicts oil prices and wages will increase next year, pushing inflation back above the 2 per cent target in early 2016.
"Disinflationary pressures look set to reverse through the course of 2015," he said in a note. "We expect to see very gradual interest-rate rises next year, most probably from 2Q15 onwards, soon after the May 7 general election." For now, the clouds in Europe, where Markit's surveys point to a weakening outlook and an economy that is drifting closer to deflation, are giving weight to the MPC majority. Minutes of this week's meeting will be published on December 17.
