Bank of England keeps interest rate at historic low

Published on Thursday 4 March 2010 13:53

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

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.