Interest rate held at 0.5% for July
The Bank of England has voted to hold the base rate at 0.5% again this month.
Following a series of cuts - which brought the rate down from 5% last October to an historic low of 0.5% in March this year - the central bank's Monetary Policy Committee (MPC) now has few options left open to it. It can't reduce the rate to a negative level, but is unlikely to increase it in the coming months either because of the continuing risk of inflation.
It is not clear how long the current low level is likely to last. Some economic indicators are showing encouraging signs, but others, including unemployment and the shrinking economy, are getting worse.
The MPC may instead focus on an extension of the quantitative easing scheme introduced earlier this year. This enables the Bank to create new money and use it to stimulate the economy by buying bonds.
It is allowed to increase its planned spending - currently £125 billion - by up to £25 billion without having to consult the Treasury.
However, for July at least, the MPC has decided to maintain its planned quantitative easing measures at £125 billion.
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.