Easy Does It from Bank as Interest Rates Are Held; MPC Pumps Extra Pounds 50bn into Economy

Western Mail (Cardiff, Wales), May 8, 2009 | Go to article overview

Easy Does It from Bank as Interest Rates Are Held; MPC Pumps Extra Pounds 50bn into Economy


Byline: Aled Blake

POLICYMAKERS' decision to pump an extra pounds 50bn into the economy shows it is still in need of support, analysts said yesterday.

The Bank of England's Monetary Policy Committee (MPC) yesterday voted to increase its quantitative easing (QE) programme by pounds 50bn to pounds 125bn, while maintaining interest rates at their record low of 0.5%.

In a statement, the Bank justified its move by pointing to a global and financial system that "remains fragile despite further significant intervention by the authorities".

It said: "The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously.

"In the United Kingdom, GDP fell sharply in the first quarter of 2009.

"But surveys at home and abroad show promising signs that the pace of decline has begun to moderate." It is the second month in a row that rate-setters have held the cost of borrowing, as attention turns to the results of QE.

The MPC has spent more than pounds 50bn so far on assets including Government and corporate debt.

The timing of the move - with one month still to go for the original pounds 75bn scheme - came as a surprise to many analysts who had forecast no update on the strategy until at least next month.

The MPC predicted that it would take another three months to complete the enlarged pounds 125bn programme. It added it would "keep the scale of the programme under review".

Both rates and QE are designed to keep inflation under control and the MPC will have made today's decision in the light of the Bank's inflation report, which is due next week and should shine more light on policymakers' predictions for the economy.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club, said much of the initial QE pot was spent on gilts - government guaranteed debt.

She said: "The lack of relevant data makes it difficult to monitor the success of QE but, with gilt yields creeping up, this has forced the Bank into using up more of the pounds 150bn available.

"With deflation unlikely to be a major concern thanks to the weak sterling keeping the cost of imports up, ITEM expects interest rates to be kept at 0.5% over the course of this year." Yesterday's decision comes in the wake of a sustained period of cuts from the MPC, which has slashed rates to the lowest level in the Bank's history.

But it is likely to keep rates on hold as it weighs the effect of QE on the UK's recession-hit economy.

Analysts believe further rate cuts are unlikely due to the potential impact on banks' margins and their willingness to lend, so the focus is set to stay on QE. …

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