Commenting on the decision by the MPC to keep interest rates on hold, Boulger said:
“Since last month’s MPC meeting the year on year CPI has fallen by 0.3% to 3.4%, although the committee had an early indication of this at its June meeting.
“Probably the most significant influence on the timing of a Bank Rate increase since last month’s meeting was the budget. The market has responded positively to the confirmation provided by the budget that the coalition has adopted a more fiscally prudent policy than the previous government and swap rates are hovering around all time lows, with 2 year swaps at 1.43% and 5 year at 2.47%.
“One factor that drove inflation up was the weakness of sterling but the impact of this is now not only unwinding but the recovery in sterling is starting to exert the opposite effect.
“The combination of the Euro being under severe pressure and the budget removing any lingering fears about the UK Government losing its AAA credit rating has resulted in the improvement in sterling.
“It is now 12% off its low point last year against the Euro and 6% off its recent dollar floor only a couple of months ago.
“These factors all add to the reasons why Bank Rate will need to remain very low for an extended period and it looks increasing likely that we will not see a Bank Rate increase this year, especially as the markets are looking at the European Bank stress testing with increasing scepticism, although the four UK banks taking part should pass with flying colours as the FSA’s stress testing was more robust.
“As long as a significant risk of turmoil in the Eurozone markets remains any rise in Bank Rate would be premature.”
