Interest rate remains unchanged
The Bank of England has held interest rate at a record low of 0.5% for the 14th month in a row.
Its quantitative easing programme, which finished in February, was also left unchanged at £200 billion as the Bank remained in wait and see mode.
However, economists warn the UK's economy is far away from healthy and is vulnerable to relapses.
However, the Monetary Policy Committee (MPC) believes this will fall back later in the year amid significant spare capacity and a drop off in these temporary factors.
More worrying is GDP growth in the first quarter coming in at a lowly 0.2% despite the recent pick-up in manufacturing and service sector data.
Combined with the ongoing political uncertainty resulting from the first hung parliament since 1974 and the eurozone debt crisis, MPC members remain cautious.
Howard Archer, chief UK and European economist at IHS Global Insight says interest rates are likely to stay low for months to come.
"This reflects our belief that the recovery will be bumpy and gradual overall. However, we acknowledge the chances of at least a token interest rate hike in the second half of the year have increased given the modestly more hawkish minutes of the April MPC meeting and the spike up in consumer price inflation to 3.4% in March.
"We still retain the view that whenever interest rates do start to rise, the increases are likely to be gradual and limited due to the need to offset the marked tightening in fiscal policy that will start in 2011 at the latest," he adds.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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.
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).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
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.