When will interest rates start to rise?
The Bank of England has voted to hold the official rate of interest at 0.5%.
The central banks also decided not to extend its quantitative easing scheme beyond the £200 billion of new cash already injected into the economy.
Interest rates have now been at 0.5% since March 2009, as the economic recovery continues.
This month's vote by the Monetary Policy Committee (MPC) – the group of Bank of England economists responsible for monetary policy – is the last ahead of the general election on 6 May.
Economists say the decision comes as little surprise.
Philip Shaw, economist at Investec Securities, says: ”With the recovery unfolding gradually there seems little need for additional quantitative easing, and it remains too early to start tightening. The current super easy stance of policy is therefore still appropriate.”
What lies ahead?
Shaw believes the next MPC meeting on 10 May will be more significant, as it will coincide with the publication of the next Bank of England Inflation Report.
However, he adds the fact that the economy remains weak could leave the MPC reluctant to change its ‘wait and see’ mode.
Shaw adds: “The MPC will also hope that the election result reduces some uncertainty over the stance of fiscal policy.”
The Conservative Party has promised to make immediate spending cuts if elected to power whereas Labour will wait until next year.
A Tory victory could see the MPC delay rate hikes, or at least introduce these more slowly, Shaw says.
“Our central case remains that rates will begin to rise in quarter four this year, based on a Conservative victory, but it is feasible that a round of sharp public expenditure reductions over the medium term results in rates being kept at 0.5% into 2011,” he adds.
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).