Bank of England governor Mark Carney keeps interest rates at a historic low

Bank of England kept interest rates at record low, but signs of economic cheer cast doubt over governor Mark Carney's pledge to leave the cost of borrowing for another three years

Mark Carney, governor of the Bank of England

The Bank of England has kept interest rates at their record low, but gathering signs of economic cheer have cast doubt over governor Mark Carney’s pledge to leave the cost of borrowing for another three years.

Policymakers also held back from any more recovery-boosting measures under the Bank’s £375 billion quantitative easing (QE) drive after recent reports have suggested the UK economy is firing on all cylinders.

Yesterday’s decision is the first since the Bank launched its new forward guidance policy, vowing to keep interest rates at their historic low of 0.5% until the unemployment rate falls to 7%.

But it has so far failed to have the desired effect on the City, with a series of caveats to the announcement last month prompting market expectations to be brought forward rather than pushed back.

While the Bank has implied rates will stay on hold until at least 2016, markets are predicting a hike in the first quarter of 2015.

A raft of exceptionally strong sector surveys this week has added to fears that rates may rise sooner than the Bank’s new policy suggests. There was no accompanying statement to the decision, despite speculation the Bank might have sought to shore up its forward guidance policy once more to win over City sceptics.

Mr Carney used his first public speech in Nottingham last week to deliver the blunt message that rates will stay low for at least another three years.

Since then, a slew of highly positive figures from all sectors of the economy have only strengthened the market’s views.

Closely watched Markit/CIPS purchasing managers’ index (PMI) readings suggested the powerhouse services sector accelerated at its fastest pace for more than six years in August.

This followed similarly strong readings from the manufacturing and construction sectors, with a composite survey combining all three hitting another record high in August.

The data fuelled hopes that third-quarter growth can beat expansion of 0.7% in the April to June quarter, with Markit suggesting growth of as much as 1.3%.

James Knightley, economist at ING Bank, said with the housing market potentially heading for another boom and inflation already well above the 2% target, one or more of the Bank’s so-called knockouts could be triggered, breaking the rates pledge.

“As such, markets - ourselves included - suspect that the first rate hike is more likely to come in early to mid 2015,” he said.

Alan Clarke, a director at Scotiabank, said: “The Bank is not going to be whipped around by short-term swings in the market - higher market interest rates are probably an irritation, but not a game changer at this point.”

He added: “Based on the fact that the vast majority of economists still expect unchanged rates for around two years, forward guidance has been a runaway success.”

Vicky Redwood at consultancy Capital Economics also pointed out that the recovery momentum does not necessarily mean rates will rise sooner than expected. Signs of slowing growth in employment across the main sectors of the economy suggest firms are meeting the upsurge in demand more through working existing employees harder.

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