Bank keeps rates low but hints at further stimulus

Jun 5 2009 by Peter McCusker, The Journal

RATE-SETTERS held back from further aid for the economy as the Bank of England paused for breath in its battle against recession.

The Monetary Policy Committee (MPC) held interest rates at their 0.5% record low, with no increases in its £125bn programme to boost the money supply after its two-day meeting.

“The scale of the programme will be kept under review,” the Bank said.

The move could signal the Bank is in wait-and- see mode as it judges the strength of possible green shoots in the economy, following better news from many industry surveys and the housing market.

Interest rates have plummeted from 5% last October and the Bank has embarked on so-called quantitative easing (QE) – effectively printing money – in unprecedented efforts to get the economy moving.

At the Bank’s last inflation report, Governor Mervyn King said there were some promising signs but warned of a relatively slow and protracted recovery for the economy.

Rate-setters have also hinted that further stimulus may be necessary and they have permission from Chancellor Alistair Darling to create another £25bn under QE if needed – to a £150bn initial limit.

Richard Bottomley, president of the North East Chamber of Commerce, said: “With the contraction of the UK economy forecast to continue for the next several months, the MPC has wisely employed all the measures at its disposal to turn the situation around as quickly as possible.

“Credit and cashflow are still causing problems for businesses and the Bank is right to pursue expansionary policies to help them.

“However, the MPC should keep one eye on the longer-term consequences of their actions as an expanded supply of money will increase the risk of inflation.”

Sarah Green, regional director, CBI North East, added: “With the quantitative easing programme now in its fourth month, the level of interest rates is not currently the main concern of the MPC.

“There are some encouraging, if tentative, signs that the quantitative easing programme is reducing the downside risk to the economy, but monetary and lending conditions remain fragile.”

The decision came as the MPC assessed a raft of conflicting data to weigh up the sustainability of any early signs of recovery.

Survey data from the UK’s powerhouse services sector signalled growth returning after more than a year of declining output. This came after more upbeat signs from the manufacturing and construction sector, with decline rates easing off.

There has also been cheer from the housing market, with house price figures from the Halifax yesterday showing a 2.6% jump in prices during May.