Double-dip fears keep rates at 0.5%

9 September 2010

Economists were today predicting more quantitative easing could soon be on the cards as fears of a double-dip recession gather pace.

The Monetary Policy Committee held interest rates at their record low of 0.5% for an 18th consecutive month and also kept its quantitative easing programme at £200 billion as it stays in 'wait and see' mode with inflation remaining stubbornly high and economic growth hitting a stumbling block.

Graeme Leach, chief economist at the Institute of Directors, said: "The Bank of England has held fire for another month, but we think the quantitative easing gun is about to be re-loaded and the order to shoot given.

"Whilst above-target inflation has stopped the MPC pulling the trigger on a further extension in quantitative easing this month, the economic threat from weak money supply growth looms ever larger."

Duncan Higgins, senior analyst at Caxton FX, added: "The minutes in a fortnight's time may signal increased arguments in favour of extending quantitative easing. Amid signs that the UK economic recovery is slowing and with the spending cuts soon to start biting, the committee members may feel that the conditions for further monetary stimulus are getting closer."

Last week, fresh figures showed that growth in the UK's manufacturing sector dropped to a nine-month low in August with nervousness over the impact of forthcoming government cuts keeping the sector on tenterhooks.

Meanwhile, the purchasing managers' index for the construction sector fell to a six-month low after a drop in the number of new homes being built. The dominant service sector is also experiencing problems with growth slumping to a 16-month low in August.

Although the figures for all indices remain above the 50 mark which marks growth Markit said that the three surveys taken together suggests that economic growth will have slowed to 0.5% in the third quarter, down from the better-than-expected 1.2% of the previous quarter.

The housing market is also slowing significantly with recent surveys registering further falls in the annual rate of property price growth.

In contrast, inflation remains above the 3% mark and is likely to rise further. Barclays Capital economists believe it could have lifted to 3.2% in August while the planned rise in VAT to 20% in January will push it higher still.

However, dissent is growing among the nine members of the Monetary Policy Committee. Andrew Sentance has voted for a 25 basis point increase in each of the past three months.

Joshua Raymond, market strategist at City Index said: "Most of the market is expecting no movement in rates until next year at the earliest with traders betting that any change in the central banks stance likely to come in the form of additional stimulus rather, than monetary tightening, particularly with the UK recovery far from certain."

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