Interest rates hit new low as Bank prints money

THE Bank of England has cut the base rate again taking the cost of borrowing to another record low of 0.5%.

The move was widely anticipated by economists but it is the Bank’s decision to embrace a policy of printing new money – known as quantitative easing – that has attracted more attention.

It is the first time the Bank has resorted to the policy which could expand money supply by up to £75bn.

With less room for manoeuvre on rates the Bank’s monetary policy committee is hoping the policy of quantitative easing will revive a moribund economy.

The Bank will implement the plan by buying assets such as government securities and corporate bonds without borrowing to fund the purchases.

There have been concerns that cutting interest rates further could hit banks’ profits, leading to a further lending squeeze, which in turn would lower chances for an economic recovery.

Since the start of the banking crisis in September the Bank has cut the base rate from 5% to the current level.

Professor Peter Spencer chief economic adviser to the Ernst & Young ITEM Club said: “ITEM believes that it is crucial that the Bank of England is allowed to implement quantitative easing swiftly and boldly given the dramatic fall in the underlying growth of the money supply.

“Credit starvation is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions and boost the supply of money and credit.”

John Gillibrand, corporate finance director at the Bolton office of insolvency specialist Tenon, said: “The latest fall in the interest rate had to be done, but the move is academic if credit still remains largely unavailable from the banks. At the moment, many businesses are unable to get access to funds, and I do not believe the government is being firm enough in their instructions for banks to act.”

Chris Fletcher, deputy chief executive of Greater Manchester Chamber, said: “We are disappointed by this decision. An increasing number of our members have voiced their concern about further drops in the bank rate and have instead called for a hold.

“There is the perception that another cut will have a negative effect on the economy rather than the desired boost.”