Interest rates held again

THE Bank of England has held interest rates for the 10th successive month.

Commenting on the decision by the MPC to keep interest rates on hold  at 0.5% again, Gary Lumby, president of Leeds Chamber of Commerce said: “As expected interest rates have been kept on hold and we expect this to be the case for the foreseeable future. With businesses set to count the cost of the bad weather, the economy needs all the support the MPC and the Govt can offer. This should include delaying public spending cuts as long as prudently possible.

“The Chamber will be looking to support its members, helping them cope with any issues and working with then to improve their prospects.”

Peter Hensman, global strategist at Newton Investment Management, said: “Like the winter weather at the start of the new decade, monetary policy remained frozen at the first Monetary Policy meeting of 2010, with the Bank keeping interest rates and the scale of asset purchases unchanged in January. 

“Despite the indications of better-than-expected retail sales over the Christmas period from groups such as John Lewis, Sainsbury’s and Next, the Bank is unlikely to be in a rush to change policy stance. 

“While the Inflation Report due in February may well signal the end of increases to the asset purchase program, the ‘exceptional uncertainties over the outlook’ highlighted in the minutes of the December meeting are likely to mean policy remains on hold for much, if not all, of 2010.”

The bank chose to leave its quantitative easing scheme unchanged as in December, after increasing it by £25bn in November.

Quantitative easing (QE) aims to stimulate the economy by printing money and using it to buy bonds from financial institutions.

With the economy still in recession many economists believe QE will trigger a recovery. But it has its detractors who fear it is stoking future inflation.

In November the Bank said the latest tranche of QE cash would take three months to work through the system. The scale of the programme will be kept under review.

Professor Peter Spencer at the University of York and chief economic advisor to the Ernst & Young ITEM Club, said: “With the current tranche of asset purchases still having another month to run it was always unlikely that the Bank would change track and the raft of upbeat data this week only reinforced this.

“So far the Bank has completed the purchase of £190bn worth of assets, and the remainder of the purchases are expected to be completed by early February, when the MPC has the opportunity to assess the situation in more detail through the Inflation Report.

“It seems as though the Bank of England is planning to gradually wind up the programme. The Bank of England has slowed the pace of its stimulus considerably, with monthly purchases set to average £8bn over November to January, compared with £25bn a month in the first five months of programme. But at recent meetings the MPC has discussed reducing the rate of interest paid on commercial reserves held at the Bank and this could be an option if economic conditions do not improve.”

“The recovery is at a delicate stage and, after some short-term volatility caused by the VAT increase, inflation is likely to drop below target for a prolonged period of time. With significant fiscal tightening in prospect, a super-loose monetary stance is likely to be maintained until the recovery is on a much firmer footing. We continue to expect interest rates to remain at 0.5% until early 2011.”

Andrew Palmer, CBI regional director for Yorkshire, said: “We’re not surprised to see that the Bank of England has made no changes to interest rates or its quantitative easing (QE) policy. The Bank had promised a thorough review of its QE policy in February, and we do not expect any rate rise until late in the second quarter of this year.
 
“Recovery in the UK is likely to be slow and drawn out, similar to that following the 1980s recession. The economy will have to absorb a good deal of structural adjustment. Banks need to rebuild their capital and reduce their leverage, consumers must restore their savings, companies must adapt to higher costs of capital, and the public sector needs to rectify its deficit. Sub-par growth is therefore likely to persist into 2011.”