“Upbeat” message from the Bank of England
The Bank of England has indicated that the interest rate is unlikely to fall any further amid evidence of a slight recovery in the mortgage market and signs that the recession is easing slightly.
The minutes from the central bank’s Monetary Policy Committee (MPC), which sets the base rate, show that all nine members voted in favour of a rate freeze in April. Although the decision to hold the official rate of interest at 0.5% was hardly a surprise – considering it couldn’t go much lower – the minutes show a general consensus that the outlook could be improving somewhat.
For a start, the minutes note that there have been signs that availability of credit was starting to improve.
On the downside, the members acknowledged during the meeting that it was too soon to call a recovery with the availability of credit liable to be volatile from month-to-month. At the same time, rising unemployment presents a major risk not least because it is likely to curb household spending for some time.
The minutes state that, overall, the “risks to the domestic economy remain weighted to the downside”.
Jonathan Loynes, chief European economist at Capital Economics, says the minutes are the most upbeat for some time.
But he warns: “The MPC still saw the risks to the economy as on the downside. As for quantitative easing itself, the MPC saw the initial effects as ‘encouraging’ but then unhelpfully admitted that some of the drop could be temporary.”
There are concerns that quantitative easing could be creating a false sense of security.
Benjamin Williamson, economist at the Centre for Economic Business Research, says: “It is clear that the long-term effects of the Bank of England’s programme of quantitative easing remain unclear even to themselves. However, today’s minutes reveal that the initial signs from the Bank’s programme of quantitative easing are positive.”
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.
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).
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.