Bank of England holds firm against negative rate

BANK of England policymakers held firm against any move towards negative interest rates today and opted instead to maintain the status quo.

Some analysts had suggested the policymakers might consider introducing negative rates in response to the downgrading of the UK’s credit rating and to act as a stimulus to lending.

Deputy governor Paul Tucker had hinted a reduction could be in mind when he addressed MPs at a Treasury select committee. While he said it would have been an extraordinary move, he hoped the suggestion would continue to remain an option.

Today’s decision by the MPC means the 0.5% rate has now been in place for four years.

What effect this will have on lending remains to be seen.

The Bank’s own data showed lending dropped by £2.7bn in the final quarter of last year and by 19% for the whole of 2012 compared with 2011.

However, whether the appetite for lending is there is also open to question as is the impact it will have on the Funding for Lending scheme.

Sir Philip Hampton, chairman of RBS, has denied banks are not lending and claimed that not enough firms are coming forward and seeking loans.

Local business leaders welcomed the Bank of England’s decision.

Steve Brittan, president of Birmingham Chamber of Commerce, said: “The announcement to keep interest rates unchanged should encourage companies to export which will promote economic development. 

“There is already a rise in manufacturing goods which are going to America and the  potential  EU/US trade agreement will help business expand into these growing US markets. Just one market can no longer be relied upon to generate 100 per cent of sales. Entering more markets means more customers can grow business and spread the risk.”

Mike Ashton, spokesman for the West Midlands Chambers of Commerce, said: “We support the MPC’s decision to maintain QE at £375bn. However, we are disappointed that the pressure for more QE is increasing, as an increase will provide only marginal benefits for the real economy, while heightening risks of financial distortions, bubbles and higher inflation.”

Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, said: “For once, there was some doubt about whether the Bank of England’s Monetary Policy Committee would maintain the status quo.

“At this stage, it is probably the only course of action available to them but what we have to see now is the opportunity for companies to actually take advantage of the base rate, which has been at a record low for four years.

“Many companies feel the time is right to invest and grow but they need access to finance to do that and, along with colleagues at the British Chambers of Commerce, we echo the call for the Business Bank to be established as soon as possible.”

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