Interest rate frozen for 10th month

7 January 2010

The Bank of England has kept the official interest rate at 0.5%, and left its quantitative easing programme at £200 billion.

The widely expected move marks the 10th consecutive month that rates have remained unchanged - the longest period of an unchanged rate since the 12 months at 4.5%, which ended in August 2006.

Quantitative easing has been frozen at £200 billion since November when the Monetary Policy Committee (MPC) voted to pump a further £25 billion into the programme.

The central bank is now on track to complete the last of its gilt purchases before the February meeting.

Expectations are growing that the UK will have emerged from recession in the fourth quarter with key manufacturing and services sector surveys showing their fastest pace of growth for two years.

Howard Archer, chief UK economist at IHS Global Insight, says: “Bank of England inaction on both quantitative easing and interest rates was pretty much a nailed-on certainty. The latest economic data and surveys have been more upbeat overall and tentative signs are emerging that money supply growth and bank lending could be picking up.”

Economists say that changes could be afoot next month when the MPC has fourth quarter economic data, along with new growth and inflation forecasts on which to base their decision.

Philip Shaw, economist at Investec, says February's meeting will be “significant”.

“From next month, the MPC has a long list of uncertainties to deal with in setting the stance of policy," he explains. "These include the sustainability and speed of the recovery, the extent to which credit flows pick up, fiscal policy (and related political unknowns) and whether it has underestimated price pressures.

“Another increase in asset purchases is not totally out of the question, if members fear a substantial rise in long term rates when quantitative easing purchases stop,” he adds.

However, Archer counters: “Barring a serious relapse in UK economic activity over the coming months, we believe that the Bank of England is probably now done on quantitative easing.”

He adds that interest rates are likely to remain at 0.5% well into 2010.

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