Bank holds interest rates at record low of 0.5%

Published 08th Oct 2009

The Bank of England today kept rates on hold at the historic low of 0.5 per cent for the seventh consecutive month and maintained the limit on its scheme of quantitative easing (QE) at £175 billion for the second month in a row.

This came as the European Central Bank also kept interest rates on hold - as widely expected. The main re-financing rate was left unchanged at 1 per cent.

The ECB also kept its overnight deposit rate, which acts as a floor for money markets, at 0.25 per cent and left its marginal lending rate at 1.75 per cent.

The lack of movement by the Bank's Monetary Policy Committee had been widely expected by economists, who said the nine-strong committee were likely to favour a wait and see approach until it had a thorough update on the economy — which will be provided next month in the Bank's quarterly inflation report.

The MPC is set to complete £175 billion in purchases of gilts and commercial paper in November. Should the MPC choose to increase the limit once again, it will have to ask the Treasury for permission.

In August, when the last inflation report was published, the MPC shocked the markets by extending the QE limit by £50 billion to £175 billion. It later emerged that three members of the MPC, including Mervyn King, the Bank's Governor, had favoured raising the limit even further to £200 billion.

Analysts said that a further increase next month could be on the cards. "We certainly would not rule out an eventual further extension to quantitative easing. Indded, a £25 billion rise to £200 billion in November remains very possible," Howard Archer, chief European and UK economist at IHS Global Insight, said.

The Bank has been forced to combat disquiet about the success of quantitative easing in the City, as several key indicators of money supply have failed to show that the scheme is having a significant impact.

Last week It called city economists in to a meeting to further explain the scheme, which was launched six months ago.

But many analysts are still concerned that rather than boosting lending, the quantitative easing scheme has led to banks simply hoarding money in Bank of England reserves.

Mr King indicated that the Bank may consider cutting the 0.5 per cent interest rates paid on such reserves, but seemed to back away from the move last month.

City analysts also hope that the minutes of the MPC's two-day meeting, published later this month, will include some details about how the Bank intends to reverse or "exit" its scheme of quantitative easing.

Source: ' Times '

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