UK interest rates remain on hold

Click to follow
The Independent Online

Rate-setters held back from further help to the economy today after monetary policy was left unchanged.

The Bank of England chose not to alter its quantitative easing (QE) scheme to boost the money supply, leaving the current total at £200 billion.

Interest rates also remained untouched at their historic low of 0.5%.

The Monetary Policy Committee (MPC) decision was widely predicted by economists who believe last month's £25 billion increase to QE showed the Bank was moving down a gear on the programme.

It comes amid optimism that the economy will pull out of recession before the end of this year, having suffered six successive quarters of negative output.

Minutes of November's meeting showed policymakers were divided three ways over their decision on how to boost the economy.

Chief economist Spencer Dale did not want to increase the money-boosting programme at all, while external member David Miles thought a £40 billion boost was appropriate and the remainder supported the £25 billion increase.

Governor Mervyn King warned last month that the UK economy had "only just started" along the road to recovery.

November's QE increase marked the smallest in the policy since it was launched in March - and far less than the £50 billion predicted in the wake of disappointing third quarter gross domestic product (GDP) figures.

While the economy is widely predicted to pull out of its slump in the final quarter of this year, recent figures have indicated that the path of the UK recovery may not be smooth.

Official data this month showed output in the hard-hit manufacturing sector stagnated in October and survey evidence from the Chartered Institute of Purchasing and Supply (CIPS) showed the UK's crucial services sector weakened during November.

Figures yesterday also showed the UK's trade gap rose to a nine-month high in October, with the level of imports outstripping exports.

This came despite an export boost from car scrappage schemes and represented a blow to the Bank's efforts to encourage the economy to shift away from a heavy reliance on imported goods - as record low interest rates weakened the pound and should have helped UK firms selling to overseas markets.

But there are more positive signs from some sectors, with figures from the Council of Mortgage Lenders today suggesting the number of mortgages advanced to people buying a home reached its highest level since December 2007 during October.

Howard Archer, of IHS Global Insight, predicted that policy tightening was still some way in the future, while rates could stay at current levels until at least the end of next year and possibly 2011.

Mr Archer said there was "little pressing need" for the MPC to change its policy this month.

"Mervyn King and other MPC members have indicated that the Bank of England is keeping all of its policy options fully open and the door is not shut on further quantitative easing, particularly given the major uncertainties and risks still surrounding both the growth and inflation outlooks," he said.

However, with the economy "almost certainly" returning to growth in the fourth quarter and inflation coming back into the equation, he predicted November's rise would be the last increase for QE.

Rising costs at the petrol pump saw the first hike in Consumer Prices Index (CPI) inflation for seven months in October, from 1.1% to 1.5%, while the imminent end of the discounted VAT rate is set to cause a spike in the measure.

David Kern, chief economist at the British Chambers of Commerce (BCC), said an increase to £225 billion could be on the cards early next year if the economy remains very weak, but said the MPC may decide to freeze the policy anyway "given the risks to the UK's international credit status".

"As the Pre-Budget Report has not provided a credible medium-term plan to curb Britain's budget deficit, the MPC's job has become more complicated, making it harder for them to increase QE beyond £200 billion," he added.

Comments