Bank freezes rates - What now? 10/09/2009 12:55

Thursday, 10 September 2009 12:55

The Bank of England held interest rates at 0.5 per cent and maintained quantitative easing aimed at £175bn for another month.

This outcome was widely expected and caused few, if any, flutters.

The economy may be starting to come out of recession - but the journey to recovery and a level of economic output akin to that before the bubble burst will be long and painful.

The FTSE 100 may have jumped over 5,000 - although it was back down under that mark at lunch - and house prices could be rising slowly, but the effects of the recession will be felt for a long time.

Unemployment is set to carry on rising through 2009 and 2010 and that provides further brakes on any growth.

As people start to lose jobs and if short-term measures to hold back recessions fail to hold, more properties will come onto the market, and prices may well start to fall again.

It could be we are through the worst of job losses, but if a general fear of economic uncertainty maintains then spending on the high street will be stalled.

For many shops - and their workers - this Christmas may well be make or break.

It is hard to predict which way consumers will jump. While a lot of belts will be tightened and turkeys may be smaller, a good number of people may take the view the worst is over and it is time to celebrate.

A further factor to key into calculations is the increase in VAT on January 1st. Retailers have pressed the government to extend the lower rate until after the sales - partly on a technical reason of difficulties repricing at a busy time and partly for commercial reasons.

The chancellor may see their point or view - or he may not.

Later this year, the chancellor will unveil his tax and spend plans in the pre-Budget report. Cuts will have to be made and all parties are agreed on this, which will hit the economy.

There is, however, a conspiracy of silence on tax rises.

It seems certain taxes will have to increase - it is jut a matter of at what point and if they hit too quickly they could well slow further the recovering economy.

Two schools of thought arise here - either a short sharp shock after the next election or a longer slower period or cuts and tax rises. Both have their pros and cons - economically and politically.

And back to the Bank of England. The VAT rise will push up inflation suggesting interest rates will hold at 0.5 per cent for some time.

The future of quantitative easing rests on whether with all this money poured into the system, any will come out in the form of greater lending.

• Tags:
• blog analysis