Bank holds rates again

Robyn Hall

November 8, 2012

Quantitative easing has remained the unchanged at £375bn.

Ray Boulger, senior technical director at John Charcol, said comments last month from both deputy governors of the Bank of England had already sent a strong signal that the monetary policy committee would be in a no change mood today even though utilisation of the last tranche of quantitative easing has just been completed.

He said: “The view that further tranches of quantitative easing would produce very limited and diminishing benefits is gaining hold.

“Furthermore a bank rate cut would weaken bank and building society balance sheets because of their contractual obligations on long term tracker loans.

“The minority of borrowers who would benefit from a rate cut are those already paying low tracker rates and who therefore need it least. A 0.25% or even 0.5% cut would be most unlikely to persuade mortgage lenders to cut their standard variable rates and therefore would do little to stimulate spending.”

Boulger added: “If as it seems likely the MPC decides in the first half of next year it needs to stimulate the economy further it will need to come up with something innovative rather than simply more quantitative easing or a bank rate cut.”

Andrew McPhillips, chief economist at Yorkshire Building Society, said: “It is good news to see the MPC hold off from announcing any further extensions to the QE programme.

“Support needs to be removed from the economy at some point and MPC members themselves are now questioning publically whether any further rounds of the programme would be effective.

“The positive Quarter 3 Gross Domestic Product figure and close-to-target inflation provide some justification for the move and in addition the Funding for Lending Scheme is more likely to get money to the people who need it most – mortgage holders and small businesses.

“The decision on Base Rate is also welcome, even if unsurprising; it is far too early to be thinking about increasing rates and, as the MPC have themselves pointed out, a cut would likely do more damage than good.”

Glenn Uniacke, senior dealer at the foreign exchange specialists Moneycorp, said: “So soon after the third quarter’s barnstorming GDP figures, more QE today was unlikely, even though recent data has not looked as positive.

“But this is largely down to the MPC sages’ declining faith in the efficacy of QE, as the economy inches towards recovery with inflationary pressures now also building.

“So the money presses will be given a rest – for now at least.

“QE has boosted the equity markets and weakened the Pound, which has helped British exporters. But there’s little evidence that the Bank’s money printing has trickled down to the real economy.

“The issue is one of credible alternatives. The jury is still out on the Funding for Lending scheme, with banks remaining focused on repairing their balance sheets in advance of forthcoming regulatory changes rather than kick-starting the economy.

“With Mario Draghi hinting that even Germany is now facing contagion from the Eurozone crisis, the Pound’s safe haven status should buoy Sterling once again – and in the short-term it should appreciate against the still struggling Euro.”

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