The Bank of England decided to keep interest rates on hold yesterday, against a background of hesitant signs that the pace of decline in the economy may be slowing.
The Bank confirmed that it will press on with its programme of "quantitative easing". At 0.5 per cent, the Bank rate stands at its lowest in the central bank's 315-year history. It stood at 5 per cent as recently as September.
The Office for National Statistics reported an improvement in the UK's balance of trade yesterday, with exports, especially outside the European Union, showing an especially healthy upward swing.
The trade deficit narrowed in the three months to February to £8.9bn, from a £9.3bn shortfall in the previous three months. During sterling's near-30 per cent depreciation in overseas value since 2007, there has been little visible benefit to British exports from the currency's weakness. But there may now be signs that it is at last feeding through to orders and output.
The export of goods rose by 2.5 per cent in February, while imports fell by 0.5 per cent. Exports to EU nations fell by 4.5 per cent, but to the rest of the world rose by 13 per cent, reflecting the exceptionally sharp downturn in major eurozone economies such as Germany. Overseas sales of food, drink, such as Scotch whisky, and tobacco were relatively strong.
With an overall "budget" of £150bn, £75bn of which is committed over the next few months, the Bank said yesterday that a total of just over £26bn of asset purchases had been made since the scheme was launched last month, and that it would take a further two months to complete the initial £75bn programme.
The vast majority of the funds – £25bn – have been spent on UK government securities, gilts, with maturities of between 5 and 25 years. Those and some more limited interventions in commercial paper (£1bn) and corporate bonds (£414m) have succeeded in pushing market rates well below the peaks seen at the height of the crisis, though they remain high by pre-credit crunch standards.
Surveys by the Bank, the CBI and the British Chambers of Commerce suggest a slight easing in the availability and cost of finance for business.
John Cridland, the CBI's deputy director general, said: "The first tentative signs of the impact on gilt yields, corporate spreads and commercial paper issue have been encouraging."
Most economists expect the Bank rate to remain low for some time, and await the publication of the MPC's minutes in about 10 days to shed more light on official thinking.
Charles Davis, an economist at the Centre for Economics and Business Research (CEBR), said: "With deflation still the major concern, we expect the Bank to hold rates throughout 2009 and midway into 2010. The next key debate will be whether the Bank extends asset purchases beyond the £150bn already authorised by HM Treasury; the MPC minutes will shed more light on this."
The Governor of the Bank of England, Mervyn King, told MPs recently he would expect to able to judge the effectiveness of the quantitative easing programme in about six months. The policy is aimed at directly boosting the amount of money in the economy, and with it spending, output and demand.
The ONS also released its latest numbers on factory gate inflation, which shows it again falling rapidly.
In the year to March, prices rose by 2 per cent, compared with 3 per cent for February. Input price inflation turned negative, at an annual rate of -0.4 per cent, compared with a positive annual rate of 24 per cent seen last autumn.
However, largely as a result of the slump in sterling, import prices are displaying some upward pressures, especially in food. Albeit only small, such embryonic indications of future inflationary pressures may eventually moderate the Bank's efforts to stimulate the economy.
The Bank may also be influenced by comments from European figures such as Christine Lagarde, the French finance minister, hinting that they disapprove of the "competitive devaluation" of sterling. The G20 communiqué stated: "We will conduct all our economic policies cooperatively and responsibly with regard to the impact on other countries, and will refrain from competitive devaluation of our currencies and promote a stable and well-functioning international monetary system."
Given such powerful influences on British policymakers, a further heavy depreciation in sterling appears unlikely, unless markets begin to react to exceptionally disappointing news on the economy or on government borrowing. The Budget is due on 22 April.