Interest rate held at record low of 0.5%

Published on Thursday 9 April 2009 13:05

THE Bank of England held interest rates unchanged at their record low of 0.5% today.

The decision comes after six months of cuts from the Monetary Policy Committee (MPC) to tackle a worsening recession.

Rate-setters are now pinning hopes on an unprecedented 75 billion programme of quantitative easing (QE) – effectively printing money – to ease credit conditions.

The MPC launched the strategy last month and has bought up almost 26.5 billion in Government and corporate debt so far under a three-month programme.

The committee is monitoring the impact of QE on the wider economy every month but announced no changes to the scale of the operation today.

The decision to hold rates and keep the pace of QE unchanged reflects the difficulty of judging the impact of the measures just a month into the process – although Bank of England Governor Mervyn King told MPs two weeks ago that he was "mildly encouraged" by results so far.

The Bank's latest credit conditions survey, however, showed lenders indicating they would make more credit available to individuals and businesses in the coming three months.

Other factors weighed up by the MPC in their two-day meeting would have included a surprise rise in inflation during February, although this was put down to the weakness of sterling sending up import prices and is likely to be a blip.

The Consumer Prices Index – which currently stands at 3.2% – is set to fall well below the Bank's 2% target later this year as recession bears down on demand and prices.

Although experts predict a fall in output during the first three months of 2009 of the same order as the 1.6% fall seen in the final quarter of 2008, surveys from manufacturing, services and construction firms have signalled that the break-neck pace of the UK's slump into recession is at least slackening off.

Stuart Porteous, head of economics at Royal Bank of Scotland, said: "While it looks like (the first quarter of 2009) may well be the worst quarter of this downturn, any talk of recovery is premature.

"The Bank of England has emptied both its barrels, and it will be some months before we can judge just how successful it has been."

IHS Global Insight economist Howard Archer added that interest rates could be held at record lows "well into 2010" as the MPC waits for the medicine to work on the ailing UK economy.

"QE is clearly now at the forefront of the Bank of England's attempts to stimulate economic recovery, not only because Bank rate has fallen as low as it can effectively go, but also because the lack of availability of credit is a serious threat to recovery prospects," he said.