Rates on hold once again
Interest rates and quantitative easing were kept on hold by the Bank of England today for the 19th month in a row.
In the lead-up to today's meeting, increasing numbers of analysts had suggested the MPC would seriously consider the possibility of increasing its quantitative easing programme.
However, despite recent calls by MPC member Adam Posen to up the amount of money pumped into the economy, the asset-purchase programme remained at £200 billion.
The decision to maintain the current level of quantitative easing is likely to have caused a split amongst the MPC - something that could be confirmed when the meeting's minutes are released.
The Committee is sure to have one eye the third-quarter GDP figures, out later this month, and the Comprehensive Spending Review before changing its course.
As fears of a double-dip recession continue to rear their head, analysts are forecasting a rise in quantitative easing in the short to medium term.
Edward Menashy, chief economist at Charles Stanley, suggested the Committee will renew the quantitative easing programme after the Comprehensive Spending Review, despite the muted response to the moves so far.
So far the effects of quantitative easing in stimulating the wider economy have not been impressive. The bank sector remains weak and unable to increase lending to companies. There are dangers that further quantitative easing could lead to major new problems rather than leading to economic recovery.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "We expect the Bank of England to keep interest rates down at 0.5% during the rest of 2010 and deep into 2011.
"Specifically, we forecast the first interest rate hike to come in the fourth quarter of 2011 and see interest rates still only at 0.75% at the end of next year."
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.
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).
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.