Bank of England rejects more emergency support as it maintains interest rate at 0.5%

 

Bank of England policymakers decided against unleashing further emergency support for the recovery today despite mixed signs over the health of the economy.

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

The no-change decision will increase focus on next month's meeting, at which most economists expect the Bank to pump more cash into the system through its QE programme.

Anna Leach, CBI head of economic analysis, said: "Looking ahead to November's meeting, we think that the committee is likely to favour further asset purchases. While there have been a few positive signs in recent data, underlying conditions remain relatively flat.

"Meanwhile, uncertainty around the international backdrop is likely to build further through the autumn, keeping confidence in check."

This month's interest rate meeting comes after a run of disappointing purchasing manager surveys in manufacturing, construction and services, suggesting a once-expected rebound to growth in the third quarter is far from guaranteed.

Manufacturing output shrank at a faster pace in September than the previous month, construction output also declined and the services industry saw its rate of growth slow down.

But Bank governor Sir Mervyn King insisted just last week that there were "a few signs" of recovery while official figures revealed a second upward revision to gross domestic product for the second quarter to a better-than-feared decline of 0.4%.

And last week's retail figures from the CBI showed a welcome rise in sales for this month after a disappointing August performance.

The bank will also be watching its funding for lending programme closely to see whether further QE is needed, with early encouraging signs of its scheme to free up the log-jam in lending.

It recently revealed that 13 banks and building societies have signed up and it is seeing tentative signs that credit is being boosted.

There have also been doubts cast over the usefulness of more QE, with the Bank's deputy governor Paul Tucker saying QE may be losing its "bite" and asking whether printing more money would be worth the risk to inflation.

Consumer prices index inflation has more than halved to 2.5% from 5.2% last September, but is forecast to start rising again by the end of the year, which could make the Bank cautious about pushing the button on more QE.

Martin Beck, UK economist at Capital Economics, said the committee is likely to increase QE in November - but also slash interest rates.

"The pressure on policymakers to do more to boost growth has not been eased by recent economic data," he said. "The inflation background could also look more encouraging by the time of the next meeting."

But the British Chambers of Commerce (BCC) said the MPC should resist clamour for more QE.

David Kern, BCC chief economist, said: "While the pressures for more QE are understandable, we believe an increase at the present time would be risky and unwise."

Mr Kern said more QE would only provide marginal benefits for the real economy, while creating longer-term risks such as financial distortions and higher inflation.

He went on: "More QE should only be considered if tensions in the eurozone pose new threats to the UK financial system.

"To boost growth, the MPC and the Government should take more effective steps to support a revival in business lending, both by using the existing QE programme more efficiently, and by employing tools other than QE alone."

PA

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