Interest rate held for October
The Bank of England has voted to hold the base rate at 0.5% in October.
It is now a year since the central bank’s Monetary Policy Committee (MPC) first cut the official rate of interest, from 5% to 4.5%. The following six months saw further chops, with the base rate hitting just 0.5% in March.
Since then, the base rate has remained on hold at half a percentage point. This is the lowest base rate seen in the Bank of England’s 315-year history.
The MPC has also decided to keep the amount of new money being created through its quantitative easing programme at £175 billion. This follows the surprise decision to pump in an additional £50 billion in August.
Minutes from that month's MPC meeting show Bank of England governor, Mervyn King, was in favour of extending this further to £200 billion. However, he did not vote for an increase the following month.
Economists say that despite becoming more upbeat about the near-term outlook for the economy, the MPC continues to have serious concerns about the strength and sustainability of the upturn.
The British Chambers of Commerce (BCC) had called for the Bank to up its quantitative easing programme to £200 billion to boost the economic recovery. This is, however, unlikely to happen until November.
“Large-scale job losses and the persistent weakness in lending to companies remain serious problems that must be resolved," says David Kern, the BCC's chief economist. "To counter the threat of a relapse, we urge the MPC to increase the quantitative easing stimulus to at least £200 billion."
The economy is still giving off mixed messages. Financial firms saw their first growth spurt in two years while the service sector purchasing managers' index (PMI) hit a two-year high in September.
New business picked up to a 19-month high and business expectations in the sector, which plays a dominant role in the UK economy, climbed to a 29-month high.
However, industrial output suffered a shock fall in August, dropping at its sharpest monthly rate since January with the summer shut-down of some factories impacting on the figures.
The Office for National Statistics said that output fell 1.9% when economists had been anticipating a marginal increase.
The housing market is also still struggling despite surveys showing further rises in values. The latest Halifax house price index says the average price of a property rose by 1.6% last month to stand at to £163,533.
Although prices are still 7.4% down on an annual basis, they have risen by a total of 1.7% since the end of 2008.
However, the sustainability of such rises is in doubt. "Continuing increases in unemployment and low earnings growth are likely to constrain the rise in demand," warns Martin Ellis, housing economist at Halifax.
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.
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.