Bank considered cutting interest rates even further
Wednesday 21 November 2012
The Bank of England weighed the case for slashing interest rates even more than their current record low of 0.5 per cent, the minutes of its November Monetary Policy Committee (MPC) meeting revealed yesterday.
The Bank, headed by Governor Sir Mervyn King, has not budged on borrowing costs since March 2009, but its staff consulted with the Financial Services Authority and the Building Societies Association about the possible consequences of cutting interest rates even further.
Rate-setters backed away from such a move because of fears that it might have an adverse impact on the profits of some lenders – particularly building societies – who are being relied on to help boost the economic recovery with loans.
The minutes said: "Staff analysis had concluded that a further cut would be likely to cause a reduction in the profitability of some lenders, especially building societies, because of the prevalence of loans with interest terms contractually or closely linked to Bank rate.
"That would weaken their balance sheets and they might have to respond by increasing other loan rates or restricting lending."
The MPC said it was "unlikely" to cut interest rates in the near future as it also awaits the impact of its Funding for Lending scheme, which allows lenders to access cheap funding in return for growing their lending.
David Miles, the committee's arch-dove, made a lone call for an extra £25bn in quantitative easing (QE) this month, although he was outvoted by the rest of the committee amid concerns over inflation, which rose to 2.7 per cent in October.
Analysts said rate-setters were less convinced over the effectiveness of QE and believe there is less slack in the economy than previously thought.
HSBC's UK economist Simon Wells said: "The MPC still seem divided over the impact of extending gilt purchases. One argument for more QE now is to limit the amount of lasting damage to supply. But if the MPC don't see this as a big problem, they may be less inclined to extend QE."
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