Interest rate freeze continues

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A CHANGE of governor at the Bank of England has not yet had an impact on interest rates.

Mark Carney took over from Mervyn King this week and cast his first vote at a monetary policy committee meeting today, but the Bank’s policy on rates and quantitative easing remained unchanged.

MPC members erred on the side of caution again and opted to hold rates at 0.5% and maintain the asset purchase programme – quantitative easing – at £375bn.

Last month the Bank warned that “significant” numbers of people could face financial problems if interest rates were to rise. It said households accounting for 9% of mortgage debt would need to take action if rates rose by 1% to 1.5%. This figure would double if there was a 2% hike.

Many observers interpreted this statement as an attempt by the Bank to prepare mortgage holders for future rate rises, or at least a reminder that the cost of borrowing will not stay this low forever. It has held rates at 0.5% since March 2009.

John Ashcroft, chief economist at Greater Manchester Chamber of Commerce, said:  “The decision to hold rates was widely expected. The economy is showing signs of recovery, confirmed by recent data including our own Quarterly Economic Survey and the important Greater Manchester composite indicator. It is too early to begin the programme of base rates rises, but it is time to say goodbye to QE as a policy option.

“The sooner long term gilt rates return to some semblance of normality, the better. The August meeting should be more interesting to rate watchers. Markets are looking for a statement on forward guidance and the future path of interest rates. Mark Carney must be careful not to make the same mistakes as Ben Bernanke, chairman of the Federal Reserve, and must avoid becoming hostage to a monthly data set.”

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