“Upbeat” message from the Bank of England

22 April 2009

The Bank of England has indicated that the interest rate is unlikely to fall any further amid evidence of a slight recovery in the mortgage market and signs that the recession is easing slightly.

The minutes from the central bank’s Monetary Policy Committee (MPC), which sets the base rate, show that all nine members voted in favour of a rate freeze in April. Although the decision to hold the official rate of interest at 0.5% was hardly a surprise – considering it couldn’t go much lower – the minutes show a general consensus that the outlook could be improving somewhat.

For a start, the minutes note that there have been signs that availability of credit was starting to improve.

On the downside, the members acknowledged during the meeting that it was too soon to call a recovery with the availability of credit liable to be volatile from month-to-month. At the same time, rising unemployment presents a major risk not least because it is likely to curb household spending for some time.

The minutes state that, overall, the “risks to the domestic economy remain weighted to the downside”.  

It is hoped that quantitative easing (i.e. creating more money) will be sufficient to bring inflation down to its 2% target.

Jonathan Loynes, chief European economist at Capital Economics, says the minutes are the most upbeat for some time.

But he warns: “The MPC still saw the risks to the economy as on the downside. As for quantitative easing itself, the MPC saw the initial effects as ‘encouraging’ but then unhelpfully admitted that some of the drop could be temporary.”

There are concerns that quantitative easing could be creating a false sense of security.

Benjamin Williamson, economist at the Centre for Economic Business Research, says: “It is clear that the long-term effects of the Bank of England’s programme of quantitative easing remain unclear even to themselves. However, today’s minutes reveal that the initial signs from the Bank’s programme of quantitative easing are positive.”

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