Bank of England may consider cutting rates

By GARETH MACKIE
Published on 18/07/2012 10:06

The Bank of England today said it may consider reducing interest rates, but only when it has assessed the impact of its funding for lending scheme.

Minutes released today from the MPC meeting, held on 5 July, showed the nine members voted unanimously to keep the base rate at its record low of 0.5 per cent.

However, two committee members – Ben Broadbent and Spencer Dale – voted to keep the stock of asset purchases at £325bn.

With seven members voting for more money printing, the level of quantitative easing now stands at £375bn, and the Bank said the additional asset purchases should take place over a period of four months.

Richard Driver, analyst for Caxton FX, said: “The market has clearly paid more attention to the fact that a larger increase in QE was considered, though it is notable that no votes were in favour.

“The MPC will probably be satisfied to remain in wait and see mode over the next few months, but very low UK inflation leaves plenty of room for further action should conditions continue to deteriorate over the second half of the year.”

The Bank said that the near-term outlook for GDP growth had weakened, adding: “It now seemed possible that output would be roughly flat over 2012 as a whole, implying a period of two years where there had been little or no economic growth.”

In a bid to kick-start the economy, the Bank and the Treasury have launched a funding for lending scheme (FLS), under which high street banks will have access to cheaper funding, but only if they lend it out to cash-starved businesses.

According to the minutes, members judged that reducing interest rates was “less attractive than an extension of the asset purchase programme”.

However, the Bank added: “The impact of the FLS and other policy initiatives might, in time, alter the committee’s assessment of the effectiveness of such a rate reduction.”