Interest rate held at 0.5%
The Bank of England has voted to hold the base rate at 0.5% following six months of cuts.
The move was largely anticipated by economists and market commentators. For one, the base rate cannot turn negative, leaving the central bank's Monetary Policy Committee (MPC) with little room for manoeuvre this month.
At the same time, the latest inflation figures revealed that the official cost of living, the Consumer Prices Index, rose slightly last month. Economists also believe that measures such as quantitative easing and the 2p fuel duty rise could push inflation back up.
If inflation does rise, then the Bank of England might have to raise interest rates sooner than , in order to bring it down to within 100 basis points of its 2% target.
James Caldwell, director of Fairinvestment.co.uk, believes the base rate will not fall any further now. However, he rules out a rise, instead predicting that it will remain stable at 0.5% for some time yet.
"It is unlikely that the base rate will creep back up any time soon, as the effects of quantitative easing have yet to be seen in the economy, along with other government initiatives," Caldwell explains.
It is likely the MPC will wait to see the impact of quantitative easing before it makes any changes to the base rate. Alongside announcing the base rate freeze, the central bank also voted to continue its programme of quantitative easing, saying it had so far injected £26.4 billion into the economy by buying assets such as government and corporate bonds.
A further £50 billion is due to be put into Britain’s economy. The Bank of England said this would take two months.
Adrian Coles, director general of the Building Society Association, says: “Leaving base rate on hold allows the impact on the wider economy of the recent rate cuts and the decision to start quantitative easing to be assessed. It will take some time before the effectiveness of these policies becomes more clear.”
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).