Interest rates timeline

Interest rates are as like the weather: we all watch the forecast and think we know what's going to happen, but at the last minute instead of the predicted hailstorm we get a heat wave instead. It's a truth universally acknowledged that anyone who tells you they know which way interest rates are going to move is usually mistaken - unless your drinking partner is Eddie George.

The monetary policy committee, which has convened every month since June 1997 to set UK interest rates, has often surprised pundits who had previously felt certain about the direction in which the economy was heading.

During this time, the Bank has taken a much steadier approach to interest rates than many City analysts anticipated. Time and again these analysts have confidently predicted a rise, only to be left with egg on their face when the MPC left rates on hold.

Here we round up who said what at the end of the month preceding each rates decision over the last year.

October 2001

Prediction: A quarter-point cut in interest rates.

November decision: Rates cut by 0.5% to 4%

Many analysts wanted a 0.5% drop in interest rates, but most didn't expect it to happen. Therefore, the bank's decision came as a surprise.

A survey published in October showed that consumer confidence had dipped to the lowest levels since the previous year's fuel crisis. However, economists remained optimistic and said that the high street was sufficiently robust to ride the storm, and the cut in rates could only help.

Low interest rates - the lowest, in fact, since 1964 - also contributed to a firm downward trend in the number of home repossessions in the UK. Martin Ellis, an economist at Halifax, said: "Unemployment has fallen dramatically, and interest rates have been low over the last few years, so far fewer people have got into difficulties.

November 2001

Prediction: That rates would be cut by a further 0.25%

December decision: Rates were held at 4%

Many experts expected rates to be shaved to 3.75%, and didn't expect base rates to reach 4% again until September 2002.

But economist Michael Saunders was beginning to warn that rate increases might be necessary in the not too distant future. "If and when global growth picks up, then the MPC will need to hike rates promptly to slow the housing market and consumer spending, in order to prevent the pick up in export growth from causing the economy as a whole to overheat," he said.

December 2001

Prediction: No change

January decision: No change, rates stay at 4%

Fears of a pitiful Christmas for retailers proved unfounded as consumers shopped until they dropped throughout the country. Low interest rates meant Christmas shoppers had a few more pounds in their pockets, and the general consensus was that keeping consumers confident was the way forward.

However, the first hints that further decreases in interest rates were unlikely were beginning to surface, with some analysts predicting that the Bank of England had very little room left to manoeuvre, and as such further cuts were not to be anticipated.

January 2002

Prediction: Rates may start rising

February decision: Rates don't budge from 4%

The overwhelming feeling from analysts was that rates had reached rock bottom, and that encouraging consumers to borrow in order to spend could have a major knock-on effect on the economy further down the line. The economy had fared pretty well considering everything that had been thrown at it, so the Bank of England was unlikely to risk increasing debt through continued low rates.

Geoffrey Dicks, UK economist at the Royal Bank of Scotland, said: "The hawks have tolerated the monetary policy committee's strategy of stimulating consumption, but the minutes [of the most recent MPC meeting] provide clear evidence of their growing unease."

What's more, said John Butler at HSBC, "Essentially, low inflation does not give a free rein to cutting interest rates," reiterating the bank's view that rates have already troughed.

February 2002

Prediction: Interest rates will rise

March decision: Rates remain steady at 4%

Bank of England governor Sir Edward George and its chief economist Charles Bean gave some clear signals that interest rates might have to rise if consumers continued with their over-zealous spending mission. This led analysts to believe a hike was in sight.

Douglas McWilliams, the chief executive of CEBR, said that by the summer of 2002 house prices would have "reached a point where affordability becomes a constraint, and there will be a slowdown in the growth of disposable income and a rise in interest rates."

But even though all the signals seemed to point towards a rate increase, the Bank of England stuck at 4%.

March 2002

Prediction: Rates would start to rise

April decision: The Bank of England keeps interest rates at 4%

Concerns about consumers continuing to spend with gay abandon, despite the possibility of a rise in unemployment, continued to bother many analysts.

On the other hand, some reports claimed that sales figures had fallen in December and January and that consumers were, in fact, beginning to tighten their grip on the purse strings.

Some City analysts were predicting an imminent rise in rates, saying this would be necessary to stave off a surge in inflation.

April 2002

Prediction: No increase

May decision: No increase; rates stay at 4%

Everything was starting to look up, but then the economy seemed to wobble and the analysts got their predictions spot on - this was no time to start increasing base rates. Retail sales data showed weaker growth than expected.

Ross Walker, UK economist at the Royal Bank of Scotland, said: "This data will strengthen the Bank's case for keeping rates on hold in the near term - probably until August."

May 2002

Prediction: That rates were set to rise

June decision: No change at 4%

City analysts said that the failure of consumers to heed the Bank of England warnings about the need to rein in their spending increased the risk of an early rise in interest rates - perhaps as soon as June.

"It is now just a case of whether we see tightening in July or possibly in June," Jeremy Hawkins, an economist at Bank of America, said with confidence. "It just comes down to how pre-emptive the Bank wants to be."

Not very, as it turned out, since rates stayed where they were.

June 2002

Prediction: Rates would rise

July decision: They didn't. Still stuck at 4%

It's not entirely surprising that many analysts thought we were in for a rate rise, since the MPC hinted more heavily than ever that an increase in borrowing costs might be needed to cool consumer debt.

Gordon Brown said he would support an increase, and lenders were crying out for a rise to calm an excitable housing market.

"A modest rise in interest rates this summer would help ensure that the housing market is sustainable in the future without causing payments difficulties for the overwhelming majority of borrowers," said Michael Coogan, the CML's director general.

July 2002

Prediction: That rates would remain at 4%

August decision: The MPC voted for no change to rates

All of a sudden, hardly anyone was expecting a rate increase. Figures began to show an easing in consumer borrowing, and the housing market had slowed slightly.

Simon Rubinsohn, chief economist at Gerrard, said these figures would "provide the MPC with further justification, if any were needed, to hold policy steady at this week's meeting."

August 2002

Prediction: No change

September decision: No change; still at 4% after 10 months

Rumours of further rate cuts had been whispered, due to a drop in consumer confidence both in the UK and the US. However, most analysts expected the MPC to stick at 4%.

Michael Saunders, an economist at Salomon Smith Barney, said: "The MPC have said that they stand ready to cut rates if real signs of economic weakness emerge, but no such evidence is to hand."

September 2002

Prediction: No change

October decision: Rates still pegged at 4%.

The MPC came under increased pressure to cut rates, with warnings that the economy would need a boost at a time of tumbling equity prices and a looming war against Iraq. But most experts expected caution to win the day.

Geoffrey Dicks, at the Royal Bank of Scotland, said: "The MPC thought a cut would be premature in September, and on the basis of robust data on house prices and consumer spending, it should be no different this time."

November 2002

Prediction: Rates to fall a quarter of a percent to 3.75%

November decision: Rates stay at 4%



The Bank of England was expected to cut its key interest rate cut on Thursday after the US Federal Reserve Board's decision to cut its benchmark rate, according to a snap Reuters poll.

Out of 23 economists who replied to Thursday's survey, seven were expecting the bank to keep its rate at 4%, while 15 expected a cut and one was undecided. Five of the economists said they had changed their views because the Fed cut its key official rate to 1.25% from 1.75% on Wednesday to try to reignite a US economic recovery.

Of these, two now expected a cut where before they had predicted no change, two still said no change was the most likely outcome but thought the chances of a cut had increased, and one said the chances of a cut had increased to 50:50.

In an earlier Reuters survey carried out October 29-31, 18 out of 32 economists said the bank would not change rates in November, while 14 predicted a cut.