Bank of England holds interest rates, QE levels unchanged

07 March 2013 12:00  [Source: ICIS news]

LONDON (ICIS)--The Bank of England (BoE) on Thursday held UK interest rates at 0.5% and left quantitative easing (QE) levels at £375bn ($560bn, €436bn), as it continues to wait for its stimulus measures to filter fully through to the economy.

However, the bank may be required to expand the QE programme from its current level in the near future, due to concerns over another economic slowdown. QE is intended to help the UK economy recover by using newly created funds to purchase assets such as government bonds.

UK GDP contracted in the fourth quarter of 2012 by 0.3%, according to the Office for National Statistics (ONS), following a 0.9% uptick in the third quarter of last year. The downturn in economic expansion has fuelled fears that the UK may be about re-enter recession for the third time since the onset of the financial crash in 2008.

The British Chambers of Commerce (BCC) on Thursday published its latest economic forecast, which sees UK growth revised downwards from 1.0% to 0.6% in 2013, and from 1.8% to 1.7% in 2014.

BCC expects official UK interest rates to remain at 0.5% until the fourth quarter of 2014, and then to rise modestly, to 0.75% in first quarter of 2015, and to 1.00% in second quarter of 2015.

“Our new forecast highlights the challenges facing the UK economy over the months and years ahead. We have advocated reducing the deficit, but have for some considerable time said that this must be coupled with a plan for growth, together creating a new model economy that will allow businesses to create jobs, invest and export,” said John Longworth, director general of the BCC.

David Kern, BCC chief economist, said QE should only be considered if new threats emerge to the stability of the UK banking system.

“In the meantime, we believe that more QE would only provide marginal benefits for the economy, while heightening longer-term risks of financial distortions, bubbles and higher inflation,” Kern said.

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 = £0.67, €1 = £0.86)

By: Franco Capaldo
+44 (0)20 8652 3214

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