MPC holds interest rates again
INTEREST rates were held at 0.5% by the Bank of England for the seventh successive month yesterday.
The Bank’s Monetary Policy Committee (MPC) also did not extend its programme of quantitative easing, a system of pumping money into the economy.
Earlier this week, Australia’s central bank raised its benchmark interest rate, the first major economy to do so since the financial crisis worsened.
In August, the MPC increased the size of the quantitative easing program by £50bn to create up to £175bn on the UK’s balance sheet to try to help banks to bring lending back into the economy.
Commenting on today’s interest rate announcement, Peter Hensman, global strategist at Newton Investment Management, said: “As expected, there was no change in monetary policy by the Bank of England today with interest rates being held at 0.5% for an the eighth consecutive month and the limit of the planned asset purchases remained static at £175bn.
“The last £50bn increase to the limit of quantitative easing measures was introduced at the August meeting, at which time the Bank indicated it was likely to take until November to complete.
“Despite the unexpected move by the Reserve Bank of Australia to increase interest rates from a 49 year low – at which they have been held since March – the factors that contributed to this decision, namely, an unexpectedly small decline in economic activity, the strong pull to demand anticipated from Asian trading partners, especially China, an unemployment rate that remains low compared to past cycles and a rapid recovery in house prices to their 2008 peak, are much less relevant in the context of the UK.
“With only gradual signs of improvement in the UK economy, Bank of England Governor Mervyn King being out-voted at the September meeting after calling for a larger increase in asset purchases coupled with King’s apparently wilful neglect of sterling – arguably as a means to provide an additional boost to future activity in the UK – and the prospect of tighter fiscal policy in 2010, there is little reason to believe that monetary policy support will be removed any time soon.”
Gary Lumby, President of Leeds Chamber of Commerce, said: “The MPC should hold off from any further interest rates changes and quantitative easing until we have conclusive evidence that its earlier actions have taken an effect on the economy.
“There is still a long way to go until we will be on the road to full recovery and we need to remain cautious.”
Mr Lumby also urged the Government to do more to help businesses.
Mr Lumby added: “The Chamber feels that there is still a lot more that the Government could be doing to help businesses in these tough times and would like to see an extension of the 15% VAT rate, a cap on further increases to the minimum wage until we see definite signs of recovery and amendments to the Empty Property Rates, such as an extension of the existing exemption for properties with a rateable value of £15,000 or less and a temporary extension of the rate free period for industrial properties from six months to one year.”
Interest rates have been lowered to a record level to try to boost lending in the economy.
The aim of quantitative easing is to encourage individual banks to expand their balance sheets – moving their reserves into something that offers a higher return, such as making new loans – and so increasing the supply of money in the economy.
Graeme Leach, chief economist at the Institute of Directors (IoD) said: “The Bank of England is in wait and see mode. Sterling weakness and quantitative easing are a potential threat to the inflation target, but the size of the output gap and continued balance sheet adjustment in the household and corporate sectors provides a significant down-force as well.
“The scale of the public sector deficit may also increase the household savings ratio if it is seen as a portent of future tax increases. The Bank will be very aware that just as the private sector recession draws to an end, the public sector recession will be only just beginning.”
Ian McCafferty, CBI chief economic adviser, said: “Some economic indicators have cast a more optimistic light recently, but businesses and households should be mindful that growth is expected to remain anaemic well into 2010.
“The Bank will therefore need to use monetary policy to support the economy for a good time yet.
“It is as yet early days in gauging the effect of the QE program so far, but companies are still facing serious constraints in their financing, so the Bank must take no risks in ending the programme prematurely.”
Sonya Kapur, investment analyst at property consultancy BNP Paribas Real Estate, said: “While interest rates are likely to stay low and quantitative easing set to increase at some point over the next 12 months, for now the more pressing issue for commercial property is the exchange rate, which is currently weak against the Euro.
“This will help prop up the commercial property market by attracting more overseas investment, the main driver so far in the recovery. It will also help newly formed overseas opportunity funds purchase property with a further discount.”
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