Breaking News: Interest rates to remain at 0.5%

THE Bank of England has held interest rates at 0.5% ending a succession of cuts made since October.

Most analysts had predicted that the Bank’s Monetary Policy Committee (MPC) would hold steady after cutting interest rates to an all-time low in March.

The Bank also introduced quantitative easing, or expanding the money supply, to help boost lending with £26.4bn injected in to the system to date.

The Bank has said that it will inject £75bn into the economy in coming months, with another £75bn to hand if needed.

Commenting on today’s decision Gary Lumby, president of Leeds Chamber of Commerce, said: “Having previously reduced interest rates to 0.5% the Bank of England were left with little room to manoeuvre.

“It is vital that the interest rate reductions and additional measures put in place by government are pushed through so the business community can make the most of what’s on offer.”

He added that findings from the Chambers’ recent survey highlighted that businesses were unaware their banks offered or utilised the Government’s Enterprise Guarantee scheme.

He said that with this in mind, it was important to see more clarity in messages coming from central government.

“Looking ahead, businesses will also want the Chancellor to use his budget, later this month, as an opportunity for the government to show that it is doing everything possible to support them,” Mr Lumby continued.

Nimble Thompson, chairman of the Institute of Directors in Yorkshire and the Humber, agrees that the decision was expected and that further changes to the base rate were unlikely in the foreseeable future. 

“We are yet to see whether the Bank of England’s ‘quantitative easing’ measures will have the desired impact and expect that this will take several months to filter through the system,” he said.

“Anecdotal evidence suggests that the banks are starting to lend again but the reduced rate of interest is continuing to be undermined by excessively high fees which, when annualised, means that businesses are still paying too much to borrow and, in some cases, this is making the whole endeavour futile.”

Prof Peter Spencer at York University and chief economic advisor to the Ernst & Young ITEM Club said that it was vitally important that monetary policy supported the economy and, with interest rates low and unlikely to change, quantitative easing (QE) was now the only option.

“The Bank needs to follow its QE policy through boldly to maintain the underlying growth of the money supply,” he said.

“Also, the G20 announcement to pump $1.1tn to tackle the global financial crisis also boosted equity markets and pushed up yields in the UK as well as other parts of Europe and the US.”

He added: “If yields continue to remain stuck at just below pre-QE levels, the Bank will have to implement a more aggressive policy, by stepping up the amount of gilts it buys back at the twice weekly auctions and increasing the amount of corporate bonds it buys in order to force long rates down again.”

Commenting on the decision, John Cridland, CBI deputy director-general, said:
“For the last 12 years, the MPC has had interest rate setting at the heart of their discussions, but the world has moved on. They are now having to influence monetary conditions more directly, with quantitative easing as their main lever.

“In the coming months, the MPC will have to judge both the pace and amount of their asset purchases. It is too early to judge quite how quickly this will begin to affect the broader economy, but the first tentative signs of the impact on gilt yields, corporate spreads and commercial paper issue have been encouraging.”