No fresh aid for economy from rate-setters

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The Independent Online

Rate-setters held fire on fresh aid for the economy today after a year of record low interest rates and emergency stimulus measures.

The Bank of England marked the first anniversary of quantitative easing (QE) by leaving the programme unchanged at £200 billion and holding borrowing costs at their 0.5% all-time low.



The Monetary Policy Committee's (MPC) "wait and see" stance comes after a month of mixed signals as the UK crawls out of recession.



Figures last week showed the economy growing at a faster pace than first thought in the last quarter of 2009, but the 0.3% advance sparked little cheer as the recession was deeper than first thought - a record 6.2%.



Recent surveys showed manufacturing and services activity picking up pace and consumer confidence at its highest level for two years, but VAT hikes and snow have hit retailers.



Meanwhile house prices also registered their first fall in nearly a year during February, according to house price surveys from Halifax and Nationwide.



Members of the MPC have also dropped hints that more QE could be in the offing if the recovery fails to gain traction and the threat of a dreaded "double-dip" recession looms.



The impact of stimulus moves such as VAT cuts and car scrappage schemes are set to fade, while the public finances offer little scope for further give-aways.



The Bank also lowered its growth forecasts in last month's inflation report, when the Governor said the economy was still "bumping along the bottom".



Capital Economics' senior economist Vicky Redwood said that without QE the UK could still be in recession, although the policy has not worked well enough to kick-start a strong recovery.



"We doubt that the £200 billion undertaken so far will be enough to ensure a strong and sustained economic recovery. We still think that the MPC will have to take further action."



The MPC's inflation-watchers also have to weigh up the current weakness of the pound amid fears over a hung Parliament delaying plans to tackle the UK's deficit.



The pound fell to a 10-month low against the dollar on Monday before recovering slightly and has slumped by around 8% so far this year.



The MPC is unlikely to make any rash policy moves to tackle a short-term inflation spike however, with the Consumer Prices Index (CPI) currently well above target at 3.5% thanks to the VAT rise and higher petrol bills.



The Bank expects CPI to drop well below its 2% target over the longer term as the huge slack created by what is now the deepest recession since official records began drives down prices.











Charles Davis, senior economist with the Centre for Economics and Business Research, said monetary policy was likely to be "in limbo" until after the election, when efforts to salvage the public finances became clearer.

He said: "The key variable ahead is what action the government of the day decides to take on the public sector deficit after the election. In many ways, monetary policy is in limbo until the scale and pace of fiscal tightening becomes clear.



He added: "It is clear that both the Bank of England and markets are in need of clarity on the policy mix ahead."



David Kern, chief economist at the British Chambers of Commerce (BCC), also warned against tightening policy too soon.



He warned: "Given the dangers still facing the economy, it is important for the MPC to persevere with an expansionary approach.



"Threats of a double-dip recession are unquestionably more serious in the near future than risks of higher inflation."

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