Bank of England leaves QE policy on hold as growth hopes rise

The Bank of England has not prescribed any shock treatment to the UK's economy following the conclusion of the Monetary Policy Committee's (MPC) rate-setting meeting this morning.

Base rate is to stay at 0.50 per cent for the 43rd consecutive month and the QE or asset purchase programme will remain at £375 billion.

The decision comes as Mario Draghi, the governor of the European Central Bank, announced details of a bond-buying programme that should lower Spain and Italy's borrowing costs and help ease the euro debt crisis.

The UK has been hampered by problems in the eurozone that has dented demand for UK exports and has discouraged firms from investing.

It is hoped that this along with government infrastructure investment and the Bank of England's Funding for Lending Scheme (FLS) will boost confidence and growth.

The MPC voted to add £50 billion to the QE programme in July and although it has said that it is likely to print more money in the future to boost the economy, it will want to see how July’s injection feeds its way through to the economy, a process that should take about three months.

Most analysts expect the MPC to hold off until November before it reignites the QE programme. At that point it is likely that the MPC will sanction a further £50 billion of asset purchases.

Anna Leach, head of economic analysis at the CBI said: "We would need only a relatively small deterioration in economic conditions to prompt a further extension of the asset purchase programme later this year."

Howard Archer, Chief UK & European Economist at IHS Global Insight said: "The MPC were always highly likely to sit tight at their September meeting given that the current £50 billion extension to Quantitative Easing will last through to November while the “Funding for Lending Scheme” is still in its infancy.

"Nevertheless, the economy is clearly still finding life very difficult; and further stimulative action remains highly likely in the fourth quarter," added Mr Archer.

The relatively positive data from the manufacturing, construction and services sector for August, released this week also reduced the pressure on the bank to act this month.

The combined PMI index for all three sectors rose to 52.2, indicating mild expansion in the economy.

All eyes will be on third quarter GDP figures at the end of October, which means November’s MPC meeting is the most likely month for the rate-setters to throw more money into the economy.

Howard Archer added: “The minutes of the August MPC meeting indicate that the Bank of England is highly likely to take further stimulative action to try and boost the struggling economy later this year.

The economy shrank by 0.5 per cent in the second quarter, the third consecutive quarterly fall cementing the UK’s double-dip recession.

The central bank will also be looking at the progress of its £80 billion Funding for Lending Scheme to assess its impact in encouraging lending.

Ray Boulger from mortgage adviser John Charcol said: “It is still too early to assess how big an impact the Funding For Lending (FFL) Scheme will have but what can be said for certain is that, despite Santander's 0.5% SVR increase, mortgage rates for new fixed rate borrowers have fallen further over the last month."

Although the MPC has discussed the possibility of cutting interest rates by a further 0.25 per cent from their record low of 0.50 per cent, there was not widespread support for this idea.

The Bank of England still thinks it is more likely than not that inflation will fall below the central bank’s target of two per cent by the end of the year.

This was the first meeting for new MPC member Ian McCafferty, formerly of the CBI

Free guide to inflation