The Bank of England is likely to wait until the first Budget after the next General Election (due before June 2010) before seriously contemplating raising the Base Rate from its current level of 0.5%.

There is an outside chance Gordon Brown will call an election this autumn but it is far more likely to take place in May 2010.  The MPC will want to wait and see if taxes are raised in the new Government’s first Budget which will surely follow shortly after the General Election, otherwise the BoE runs the risk of raising rates before an election only to have to lower them again shortly afterwards to offset fiscal tightening by an incoming Government getting to grips with the budget deficit.

There is so much spare capacity be be worked through when the economy recovers that the MPC runs little risk of falling too far behind the curve by waiting until after the next election before starting to take back some rate cuts.  The MPC will surely want the economy to develop some serious momentum before risking tightening monetary policy as they will not wish to snuff out an economic recovery by raising rates too soon (which was the mistake made by the Japanese in 1997).  The MPC can easily afford to wait to see a clear turn lower in the unemployment rate without running the risk of allowing inflation to run away.

So the stage is set for Base Rates to remain at 0.5% until at least the summer of 2010.