BoE keeps interest rates at 0.5%
Interest rates were kept at 0.5% for the sixth consecutive month today, as the Bank of England (BoE) also maintained its current level of quantitative easing.
Despite some green shoots of economic recovery rearing their heads recently, the nine members failed to throw any surprises in their latest policy meeting.
The Bank first set the record low of 0.5% back in March as it battled an ailing economy on a domestic and international level.
Although the BoE has warned that recovery is far from certain - predicting a "slow and protracted" return to growth, it has also opted to maintain its current level of quantitative easing at £175 billion.
Governor of the Bank, Mervyn King, has already said that it will take some months for the policy measures to fully take effect.
Howard Archer, chief UK and European economist at IHS Global Insight, suggests there may have been a split within the MPC over plans to increase quantitative easing.
With the current QE programme set to expire at the start of November, Archer says there was little need for an extension to the £175 billion.
He did, however, have a note of caution.
"Further quantitative easing remains very possible, as serious headwinds still face the economy and sustainable, significant economic recovery is far from guaranteed - despite likely growth in the third quarter.
"A key factor as to whether or not quantitative easing is further extended will be whether or not there are growing signs that bank lending is picking up - as this is vital to growth," he says.
Archer adds that he sees interest rates sticking at 0.5% for some time - with a rise not likely "until at least the latter months of 2010".
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.