Bank of England holds interest rates at 0.5%

Thursday, 04 February 2010 12:24

The Bank of England's Monetary Policy Committee (MPC) has held interest rates at 0.5 per cent for the tenth month in a row while also saying that it had halted, for the time being, its £200 billion quantitative easing (QE) programme.

It said while the economy recorded "sluggish growth" by the end of 2009 spending by households appeared to have picked up a little. Although it said the improvement in consumer spending may only be temporary.

The MPC added its policy of QE, the lower level of sterling and the recovery in UK export markets would all help to support future economic activity. But it warned credit conditions were likely to remain restrictive, while the need to strengthen public and private sector finances would also limit spending.

In a statement the Bank said "On balance, the committee believes that the prospect is for a gradual recovery in the level of activity. The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come.

"That is likely to mean that inflation will fall below the target for a period."

Consumer Price Index (CPI) inflation rose sharply, to well above the government's 2 per cent target at 2.9 per cent, in December.

That rise was largely accounted for by higher petrol price inflation and return of VAT to 17.5%, the Bank said. It added inflation was likely to have risen further in January as the increase in VAT took hold but that pay increases were likely to have remained subdued.

The Bank said it decided to hold both interest rates and the level of QE in order to bring inflation back within the government's 2 per cent target.

It said that the combination of a lower bank rate and the £200 billion already injected into the economy would "continue to impart a substantial monetary stimulus to the economy for some time to come."

But it refused to rule out further injections into the economy if they were needed saying it would: "continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them."

Ray Boulger, a spokesman for independent mortgage advisers John Charcol, said the decision to hold interest rates came as no surprise.

He said: "The only real interest this month was whether the QE programme would be extended and whether there would be any comment from the MPC giving an indication about what next week's Quarterly Inflation Report will say. Despite the much bigger than expected increase in inflation in December the indications that it will fall back to the target 2 per cent, and probably lower, within a year negates the need to take corrective action for the current inflation surge."

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