Bank leaves rates on hold as it considers impact of radical measures

Published 10th Apr 2009

The Bank of England paused for breath yesterday in its battle to combat the economic slump, pegging interest rates and staying its hand over any other changes in its aggressive recession-fighting strategy.

After a frantic six-month-long scramble to shore up the economy with drastic rate cuts and, since last month, a radical move to jump-start growth by “printing money”, the Bank switched to a wait-and-see stance.

The verdict from the Bank’s Monetary Policy Committee confirmed City predictions that official interest rates would be left on hold at their present 315-year low of 0.5 per cent. It effectively brought down the curtain on the present round of rate cuts. Mervyn King, the Bank’s Governor, had made clear last month that he saw little scope for further cuts. The record of the MPC’s last meeting showed that it was anxious that further rate cuts could backfire, deterring banks from lending and hitting savers.

The Bank had also been widely tipped to order no change for now in its ground-breaking “quantitative easing” plan to pump extra, newly created money through the economy by buying up a range of assets from the financial markets.

The controversial move to buy government and corporate bonds worth a total of £75 billion over three months began only last month and is so far a third complete, with the Bank having so far purchased some £26 billion of UK government bonds or gilts, and about £400 million of corporate bonds – company IOUs.

There was little in yesterday’s latest economic data to induce the MPC to alter its course.

Market nervousness over longer-term inflation dangers from the huge stimulus being given to the economy had been stoked by a recent, surprise rise in February in consumer price inflation, the Bank’s target measure. But the MPC’s more immediate anxieties that the economy could slide into the grip of a damaging bout of deflation were kept firmly on its agenda by news on prices in UK manufacturing.

Producer output prices, for goods leaving Britain’s factories, rose last month at an annual pace of only 2 per cent, sharply down from 3 per cent in February to the lowest since July 2007. The slide in prices charged by manufacturers came as they responded to steep declines in their costs. The annual rate of inflation for so-called “input prices” – factories’ raw materials, components and fuel – turned negative for the first time since August 2007, dropping to minus 0.4 per cent last month.

Separate trade figures showed that a key source of inflation, from rising import bills triggered by the weakness of the pound, began to fade. The pace of increase in import prices dropped to an annual 8.8 per cent in February, down from 10.1 per cent in January and the lowest since early last year.

There remained little sign in the data of much boost to exports from the pound’s steep decline. The UK deficit on trade in goods narrowed to £7.3 billion in February, from £7.8 billion the month before, as exports rose and imports fell. But total export volumes remain 14 per cent down on a year ago. Exports to nonEU countries rebounded by 13 per cent in February, after a plunge in January, but exports to the EU tumbled by 4.7 per cent.

Source: ' times '

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