There may be splits but Bank holds rates steady

Bank of England policymakers yesterday voted to hold interests rates at their historic low in a decision that is likely to conceal a three-way split over how to respond to a highly uncertain economic outlook.

The central bank also resisted calls from business leaders to inject more cash into the economy via its programme of quantitative easing (QE) as fears grow over the impact of the government's looming spending cuts. It marks the 19th consecutive month that borrowing costs have been held at a record low of 0.5 per cent.

Both the Institute of Directors (IoD) and British Chambers of Commerce have been calling for a 50 billion extension to QE before the end of the year. Between March 2009 and January of this year the bank has bought 200bn of financial assets under its financial stimulus programme.

Support for more QE is increasing within the bank's monetary policy committee, with a recent speech by member Adam Posen making clear he feels now is the time to pump more money into the economy. Others have highlighted the risk of stubbornly high inflation.

Economists believe the MPC was divided this month, with Posen opting for so-called QE2 and Andrew Sentance voting once more for a quarter-point rise in rates to calm inflation.

Minutes of the latest meeting are due to be made public on 20 October.

Howard Archer, chief economist at IHS Global Insight, believes that most MPC members will want to see initial third-quarter growth figures, due later this month, and details of the government spending review before making any move.

"We put the odds of the Bank eventually enacting more quantitative easing at 40 per cent and rising," he added.

Graeme Leach, chief economist at the IoD, said: "Monetary policy needs to help ensure a sustainable recovery before the public-sector recession begins.

"Yes, inflation is above target now, but a double-dip recession would raise the spectre of deflation. At present the growth threat is more of a danger than inflation."