UK interest rate kept unchanged

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 10th March 2015 16:32 EDT

Growth in Britain's construction industry improved to a four-month high last month suggesting Britain's economy started 2015 strongly. However building firms hired staff at the slowest pace in more than a year. The UK construction purchasing managers' index (PMI) rose to 60.1 reaching its highest level since October 2014. A fall in output in construction was a drag on Britain's gross domestic product growth in the fourth quarter of 2014, but economists said they expected the weakness in the industry would prove short-lived, which it appears to have been.

UK interest rates have been kept unchanged again by the Bank of England, They have now been at their record low of 0.5% for six years.  Rates were first cut to 0.5% in March 2009.  Recent growth in the economy has prompted speculation that rates will start to rise again in the near future.  Continuing low inflation, now at 0.3%, gives policymakers little reason to raise the cost of borrowing.  The Bank also kept the size of its quantitative easing (QE) programme unchanged at £375bn.

Inflation is expected to remain low and could even turn negative briefly largely to a near-halving in the price of oil since last summer.  Mark Carney has even talked about lowering interest rates further to a new record low, should prices remain near flat for longer than expected. Minutes of last month's MPC meeting showed members voted no for a change to interest rates. There was a debate revealing a three-way split between the nine members as to their future direction, with two arguing there could be a case to raise rates later this year.

The Eurozone unemployment rate fell to a 33-month low, indicating Europe's labour market may be turning a corner. The unemployment rate fell to 11.2% in January, down from 11.3% in December. The Eurostat report states that the number of unemployed people in the euro area fell by 140,000 in January. However, unemployment in the Eurozone remains widely varied with unemployment levels in Spain are at 23.4% in comparison to Germany at 4.7%.

Also inflation in the Eurozone rose to -0.3% last month, showing prices did not fall as fast as expected. This is a big jump up on the -0.6% decline recorded in January. The report stated that service sector prices rose by 1.1%, alcohol and tobacco prices rose by 0.5%, meaning the decline is mainly due to falling energy prices, which should give the Eurozone economy a boost as consumers will have more money in their pockets. Fears that Europe is being dragged into a deflationary downturn may have been overstated.

The European Central Bank has raised this year's eurozone growth forecast to 1.5%, up from 1% previously. Mario Draghi said economic growth in the eurozone would strengthen slowly to reach 2.1% by 2017.  He said there would be low negative inflation in the months ahead before prices began to rise in late 2015, with 1.8% inflation in 2017.  The bank kept the eurozone's key interest rate unchanged at 0.05%, as expected.

The ECB QE scheme will inject at least €1.1 trillion (£834bn) into the eurozone economy by purchasing €60bn of assets a month until September 2016, Mr Draghi added. It will start on Monday 9th march. He also said Greece could not rely on the ECB to raise the limits on Athens of short-term debt, and that the rules also meant the ECB could not buy Greek bonds under its new asset-buying programme.

In the US the number of Americans filing new claims for unemployment benefits last week rose to its highest level since May, which could raise concerns about some weakness in the labour market. Other data on Thursday showed non-farm productivity contracted more sharply than previously thought in the fourth quarter as output failed to keep up with a jump in hours.  Initial claims for state unemployment benefits increased by 7,000 to a seasonally adjusted 320,000 for the week ending Feb 28, the highest reading since mid-May.

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