Interest rate frozen for 10th month
The Bank of England has kept the official interest rate at 0.5%, and left its quantitative easing programme at £200 billion.
The widely expected move marks the 10th consecutive month that rates have remained unchanged - the longest period of an unchanged rate since the 12 months at 4.5%, which ended in August 2006.
Quantitative easing has been frozen at £200 billion since November when the Monetary Policy Committee (MPC) voted to pump a further £25 billion into the programme.
The central bank is now on track to complete the last of its gilt purchases before the February meeting.
Expectations are growing that the UK will have emerged from recession in the fourth quarter with key manufacturing and services sector surveys showing their fastest pace of growth for two years.
Howard Archer, chief UK economist at IHS Global Insight, says: “Bank of England inaction on both quantitative easing and interest rates was pretty much a nailed-on certainty. The latest economic data and surveys have been more upbeat overall and tentative signs are emerging that money supply growth and bank lending could be picking up.”
Economists say that changes could be afoot next month when the MPC has fourth quarter economic data, along with new growth and inflation forecasts on which to base their decision.
Philip Shaw, economist at Investec, says February's meeting will be “significant”.
“From next month, the MPC has a long list of uncertainties to deal with in setting the stance of policy," he explains. "These include the sustainability and speed of the recovery, the extent to which credit flows pick up, fiscal policy (and related political unknowns) and whether it has underestimated price pressures.
“Another increase in asset purchases is not totally out of the question, if members fear a substantial rise in long term rates when quantitative easing purchases stop,” he adds.
However, Archer counters: “Barring a serious relapse in UK economic activity over the coming months, we believe that the Bank of England is probably now done on quantitative easing.”
He adds that interest rates are likely to remain at 0.5% well into 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.
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).