'Wait and see' as Bank of England holds rates

 

The Bank of England held off from further emergency support today, despite the threat of a triple-dip recession hanging over the UK economy.

Policymakers remained in "wait and see" mode again this month, holding rates at their record low of 0.5% and maintaining the Bank's quantitative easing (QE) programme at £375 billion.

Recent figures estimate the economy slipped back into the red in the final three months of last year, but the Bank's Monetary Policy Committee (MPC) is hopeful that its Funding for Lending Scheme (FLS) and a recent fall in the price of sterling will boost the recovery.

Its hopes for the turnaround were given a boost today after the Office for National Statistics reported a 1.6% rise in manufacturing output for December, a figure ahead of City expectations.

The increase in production was in part fuelled by rising exports as the UK's goods trade deficit narrowed to £8.9 billion in December. The figure remains high by historical standards as the UK attempts to rebalance towards being an export-oriented economy.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said the latest month of inactivity from the Bank came as little surprise.

She said: "The weak fourth quarter is unlikely to have swayed further members into more QE action and, if anything, some survey indicators have been a little better at the start of the year.

"It's still wait and see on how Funding for Lending, which is the main monetary game in town, will help businesses as well as households."

The Bank's multibillion-pound FLS scheme, where it provides cheap money to lenders, has shown some encouraging signs of providing firepower to theeconomy after Halifax house prices recorded their strongest quarterly rise in three years this week.

But today's decision prolongs the agony for savers, who are unlikely to see any respite from painfully low interest rates for the foreseeable future. Investment banking giant Citi recently said it believed rates would be held at historic lows until mid-2017.

Markit economist Chris Williamson said: "The country is not out of the woods as far as a slide back into recession is concerned.

"Consumer spending remains under pressure from low wage growth and high inflation, and threats to the global economic outlook persist, especially in relation to political tensions driving a renewed escalation of the eurozone crisis."

The MPC took the unusual step of including a statement to support its decision to keep rates and QE on hold.

It said it continues to believe that the UK economy is set for a "slow but sustained recovery", aided by a further easing in credit conditions.

"But the risks are weighted to the downside, not least because of the challenges facing the euro area," it added.

Inflation is expected to remain above the Bank's 2% target for the next two years before falling back. More details on the Bank's forecasts will be revealed next week in its quarterly inflation report.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said she expects the economy to remain weak in the early part of this year, suggesting that Q4's dip was not entirely due to temporary factors.

She added: "For now, our best guess is that the committee does more QE at May's meeting.

"Indeed, we expect next week's inflation report to leave the door open to more QE by showing inflation still expected to come down to, and possibly fall below its 2% target, at the two-year policy horizon."

PA

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