Interest rates and QE remain unchanged
The Bank of England held interest rates at their record low of 0.5% for the 20th successive month, with quantitative easing also unchanged.
Despite yesterday's announcement from the Federal Reserve of its second tranche of quantitative easing, the Bank of England's Monetary Policy Committee (MPC) opted to ignore the path of pumping further money into the economy.
Although a difference of opinion is expected among the MPC's members over the decision, the move was far from a surprise following indicators suggesting the green shoots of recovery in the economy.
There was a 0.8% rise in GDP figures for the third quarter, following on from the second quarter's 1.2% increase.
Analysts from Charles Stanley commented: "Undoubtedly, the surprisingly strong third-quarter UK GDP figures dissuaded the MPC from extending quantitative easing.
"Third-quarter GDP translated into an annualised growth rate of 3.2%, which was both above trend and in excess of the 2.35% rate estimated by the Office of Budget Responsibility as recently as June. This better performance was augmented by stronger manufacturing data for October.
"Overall, the stronger economic data has probably inclined the MPC to wait until February 2011 before reviewing the QE2 issue."
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).
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