Bank holds rates at record low

 

The Bank of England held fire on further emergency measures for the UK economy today, despite another dose of worrying news from the manufacturing sector.

Interest rates were kept at a record low of 0.5% while the Bank's quantitative easing (QE) programme remained at £275 billion following the increase of £75 billion in October.

The no-change decision came despite a call from the British Chambers of Commerce to increase its support with a £50 billion top-up to QE, following October's shock increase.

But the Bank opted not to move yet as it waits for a clearer picture of how the economy fared in the final quarter of 2011 following mixed recent data.

Fears intensified today that the economy might have slipped into reverse in the fourth quarter of 2011, after Office for National Statistics figures revealed industrial production declined by 0.6% in November, following a 1% fall in October.

Manufacturing output fell 0.2% in November although its decline was at a lower rate than the previous month.

There have also been recent signs that the economy improved slightly in December, with industry surveys coming in stronger than expected.

Growth in the powerhouse services sector, which makes up 75% of the UK economy, is likely to have saved the wider economy from contraction in the final quarter, while surveys reported growth in manufacturing and construction.

But the crisis in the eurozone - which the Bank cited as one of the key threats to UK recovery - continues to rumble on as EU leaders are yet to deliver a concrete plan to resolve the region's problems.

Economists still expect a further £50 billion of QE from the Bank of England in both the first and second quarters of this year, taking the total up to £375 billion.

The minutes from the monetary policy committee's (MPC) last meeting in December suggested a further cash injection to boost the economy was highly probable but not until February at the earliest, as the committee has yet to complete the latest round of QE.

Ian McCafferty, chief economic adviser at business body CBI, said: "Today's decision by the MPC to leave monetary policy unchanged was expected, since the current round of asset purchases is not yet complete.

"But with economic conditions fragile and inflation expected to undershoot, the MPC appears to be signalling that a further extension of the asset purchase programme is likely in the months ahead."

Holding interest rates at 0.5% will be welcomed by borrowers, but the extended period of lower lending costs spells more misery for pensioners and savers, who will continue to suffer low returns on their money at a time when inflation is eroding the value of their deposits.

PA

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