Bank keeps interest rates on hold

 

The Bank of England refrained from unleashing further emergency support for the economy today, despite receiving a jolt over the health of the UK's recovery.

The Bank's Monetary Policy Committee maintained interest rates at record lows of 0.5% and held its quantitative easing (QE) programme at £375 billion as it continues to work through £50 billion of asset purchases announced in July.

The move comes after positive manufacturing and services surveys revealed tentative signs of a recovery - but this optimism was dampened after the Organisation for Economic Co-operation and Development slashed its growth forecast for 2012.

The think-tank expects the UK will fail to pull out of its double-dip recession in the current quarter, which will see a 0.7% decline on an annualised rate, compared to previous expectations of a 0.5% decline.

Most economists have predicted a further QE boost in November, after the current run of asset purchases is completed, while some believe a rate cut is on the cards.

Anna Leach, CBI head of economic analysis, 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."

The Bank also recently admitted that QE has increased the fortunes of the wealthiest 5% of Britons while eroding the value of many pension funds.

Ros Altmann, director-general of Saga, said the Bank was wrong to suggest that pensioners have not lost out and said QE was causing "significant economic damage".

Aside from recent surveys, there has been little change in the economic outlook since the MPC's last meeting, although SSE's 9% hike in energy bills from next month and the impact of US drought on food prices have threatened the inflation outlook.

The Bank currently expects the rate of inflation - which increased to 2.6% in July - to fall to the Government's 2% target by the end of this year.

Governor Sir Mervyn King and his colleagues will also want more time to assess the impact of the UK's £80 billion "funding for lending" scheme, which was launched in the summer with the aim of unclogging the flow of credit.

The committee has also considered cutting rates below the current level of 0.5% - a move that once seemed improbable - although the Bank continues to favour QE as its economic weapon of choice.

Today's meeting was the first for former CBI chief economic adviser Ian McCafferty, who has replaced Adam Posen.

In a report released last month, the Bank said its QE programme has increased total household wealth by 16%, or £600 billion, after increasing the value of assets.

But it is the richest households - holding around 40% of these assets - that have benefited the most, according to the Bank.

The report also found that pension funds with hefty shortfalls will have seen their deficits increased further, but the Bank rejected fears that QE has hurt pensioners.

Nida Ali, economic adviser to the Ernst & Young ITEM Club, said: "The Bank has given no indication of any intention to loosen policy further in the coming months, but the downside risks, particularly from the Eurozone crisis, remain significant.

"Were the crisis to worsen, the Bank would be forced to provide far greater monetary support, both in the form of more QE as well as other 'unconventional' measures."

Victoria Clarke, economist at broker Investec, said the minutes of the September meeting will be read carefully for hints of fears over rising inflation.

She said: "With CPI inflation having crept back up again in July, rising from 2.4% to 2.6%, we will be watching out for hints of the committee looking a touch more nervous about the prospect of inflation retreating to or even below the 2% mark over the next couple of years.

"Indeed, our own forecast now no longer sees a decline in CPI inflation to the 2% mark over the next two years."

PA

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