Bank of England maintains interest rates, QE on hold

08 November 2012 12:00  [Source: ICIS news]

LONDON (ICIS)--The Bank of England (BoE) on Thursday held UK interest rates at 0.5% and held off from announcing another round of quantitative easing (QE), despite fears about the resilience of the UK’s economic recovery.

The bank’s Monetary Policy Committee (MPC) is expected to finish working through the latest £50bn ($79.4m, €64.1m) tranche of QE funding this month, but the bank may be required to expand the QE programme from its current level of £375bn in the near future, due to concerns over another economic slowdown.

The UK exited recession in the third quarter and expanded by an estimated 1% on the back of a fillip from the London Olympics. Growth then slumped to 0.5% for the three months to the end of October, according to the National Institute of Social and Economic Research.

A foundering recovery is likely to raise pressure for the BoE to expand the QE programme next month. However, members of the MPC are understood to be concerned about the impact of further monetary stimulus on inflation, which stood at 2.2% in September, according to the Office of National Statistics. BoE’s inflation target is 2% or lower.

David Kern, an economist for the British Chamber of Commerce, urged the bank last week not to increase QE, stating that any increase would be counter-productive.

He said: “Adding to QE should only be considered if new threats emerge to the stability of the UK banking system. With yields on gilts at very low levels already, more QE would only provide marginal benefits for the real economy, while increasing longer-term risks of financial distortions, bubbles and higher inflation.”

The 2008–2009 recession forced the BoE into a series of interest rate cuts, with rates falling from 5.5% in October 2008 to the current record low, which was set in March 2009.

(£1 = $0.63, £1 = €0.78)

By: Tom Brown
+44 208 652 3214

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