Cameron first PM since war to enjoy whole term with no rate rise

David Cameron has become the first UK prime minister since Clement Attlee in the 1940s and 1950s to serve a whole term in parliament without a change in interest rates.

While many recent British leaders including James Callaghan, Margaret Thatcher and John Major were thrown off course by rate rises, Mr Cameron has basked in the cheapest borrowing for over 300 years.

Savers have complained but the working families with mortgages so beloved of politicians have rarely had to worry less about the costs of financing their homes.

And although today's economic landscape, with steady growth and a strengthening labour market, is radically different to the recession-mired Britain of March 2009 when rates were cut to their current level, few expect a change in monetary policy soon.

On Thursday, in its last policy decision before the general election, the Bank of England said rates and the stock of assets bought under its quantitative easing programme would remain unchanged.

Markets are now not fully pricing in a rate rise until the second quarter of next year.

Chris Williamson, chief economist at data company Markit, said "the 'Goldilocks' scenario of robust economic growth and ultra-loose policy shows little sign of ending any time soon."

It is a far cry from last summer, when tumbling unemployment and rapidly increasing house prices had many economists betting on the first rise by early this year.

Three factors have stopped members of the Monetary Policy Committee pulling the trigger. Firstly, in a stroke of luck for politicians, an unforeseen tumble in oil prices has pushed inflation right down in all oil-importing countries.

In a less welcome development, wage growth has continued to disappoint and finally the strength of the pound has helped reduce the cost of imports.

Andy Haldane, the BoE's chief economist, in recent months has even floated the possibility of a further rate cut to provide more stimulus to the economy if deflationary expectations become entrenched.

Martin Beck, senior economic adviser to the EY Item Club, said that with the MPC alert to the risk of inflation becoming stuck below the Bank's two per cent target "the government won't need to worry about a rise in interest rates for some time to come - regardless of which party is in power following the general election."

Inflation is expected to remain around its current low of zero per cent for most of the year. But in the autumn, when the impact of the rapid fall in oil prices starts to drop out of the calculations, it is likely to start edging up.

Fabrice Montagne, an economist at Barclays, said that he expected inflation to near 1.5 per cent by the end of the year, putting "the BoE in a more favourable position to discuss a rate hike once again."

But there is a caveat: the strength of the pound. While sterling is below its March peak, over the past month it has appreciated to levels not seen since the summer of 2008 on a trade weighted basis.

This has hit ambitions of rebalancing the economy towards exports, but its deflationary impact has obviated the need for a rate rise.

Recent speeches from senior BoE officials show this factor is very much on their minds. Governor Mark Carney said last month that while the MPC should disregard one-off shocks such as falling oil, "it may be appropriate to take into account persistent external deflationary forces arising from the combination of continued foreign low inflation and the protracted effects of sterling's strength on the prices facing UK consumers if those forces were to intensify."

The BoE is now in purdah ahead of the election, so the next update on its thinking will be in its quarterly inflation report on May 13. If the polls are right and no party gains an outright majority, that is likely to coincide with coalition negotiations.

Sam Hill, senior UK economist at RBC Capital Markets, said that a renewed bout of sterling strength could tip the balance on the medium-term inflation forecast, meaning savers hoping for an end to rock bottom interest rates might need to wait awhile.

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