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Bank holds rates at 0.5 per cent

Sarah Davidson

September 9, 2010

The previous change in Bank Rate was a reduction of 0.5% to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves began on March 5, 2009. The most recent change in the size of that programme was an increase of £25 billion to a total of £200 billion on 5 November 2009.

MARKET REACTION

Lai Wah Co, CBI head of economic Analysis, said: “In recent weeks there has been more talk about the need to expand monetary policy, amid concerns about how quickly growth momentum will fade in the coming quarters at home and abroad. However, economic indicators still suggest the UK recovery is on track, although we expect it to be bumpy and slow.

“Our view is that monetary policy is likely to stay on hold for a while, as the Bank monitors economic developments.”

Barry Naisbitt, chief Economist at Santander UK, said: “As expected, once again there was no change from the Monetary Policy Committee (MPC) on rates today.

“Bank Rate has now been held at a record low of 0.50% for a year and a half and, as might be expected after such an unusually long period of unchanged rates, speculation is building about the likelihood of a change.

“The minutes of recent meetings show that one MPC member has voted to raise rates.

“But some other members remain concerned that more monetary policy help for the economy might yet be needed.

“We’ll find out more about these views and see if the balance of the debate is changing when the Bank of England publishes the minutes of the MPC meeting later this month.

“With inflation still above the 2% target, although it did reduce to 3.1% in July, and strong GDP growth of 1.2% in the second quarter but some concerns about a weakening of growth ahead, it seems likely that the MPC vote will again have been split in September.

“The MPC still has its foot down hard on the accelerator pedal and it faces the tricky task of deciding whether it should ease back a little some time soon or wait to see if it needs to press down even harder.”

And Ben Thompson, director, mortgages at Legal & General, added: “It’s getting interesting now and although it was obvious that rates would remain unchanged today there will certainly have been some real debate around whether the recovery is well underway or if we’re in for tougher times again.

“Persistently stubborn inflation combined with a flagging economy is certainly not a marriage made in heaven and the two will no doubt co-habit for some time to come, but sooner or later things will be come clear as the impact of spending cuts and tax increases are felt. It is our view that rates will remain flat for sometime to come.”

Paul Hunt, managing director of Phoebus Software, said the MPC would come under increasing pressure to increase rates if inflation continues to grow.

“There is some argument for the MPC to make a gesture of keeping inflation in check by raising rates by 25 basis points,” he said. “But I don’t think they will. Inflation is being maintained above the target rate in order to help the economic recovery.

“Rates won’t go up until next year and quantitative easing won’t be extended unless there is a significant weakening of the economy. And despite many predicting that third quarter growth will be weaker than expected, yesterday’s encouraging manufacturing growth figures may alleviate the fears of a double dip.”

Mark Pilling, managing director, Spicerhaart corporate sales, thought it unlikely that rates would be kept at this “artificially low level for much longer”, pointing out that MPC member Andrew Sentance has already voted three consecutive times for a rate rise and inflation remains well above the 2% target.

He added: “When rates inevitably do rise, combined with the job losses in the public sector and VAT increase to 20% from January, it is likely that the resulting loss of disposable income will impact hard on homeowners who may struggle to keep up with mortgage repayments. As a result, we are facing increased arrears and the very real possibility of repossessions escalating once again.”

THE IMPACT ON SAVERS

Kevin Mountford, head of banking at moneysupermarket.com said the decision would prolong the misery that UK savers had faced for the last year and a half.

“After 18 months of struggling to generate any returns on their savings, anyone with savings will be hoping Base Rate starts to climb sooner rather than later,” he said.

To make matters worse for the nation’s struggling savers, the average interest rates across the leading easy access accounts has actually fallen over the last 18 months from 2.98% to 2.72%, despite Base Rate having remained flat. This 0.26% decrease illustrates the degree to which Britain’s banks have capitalised on the low base rate environment to the detriment of their customers’ savings pots.

But Mountford added: “That said, the leading savings rates are significantly higher than the rates of interest most people are earning on their money.

“The average instant access account is paying just 0.23 per cent, while the leading deal is paying 2.80%. And if you have money you can afford to lock away you can earn even more. The Bank of Baroda’s five-year bond is paying a fixed rate of 4.90%.

“Therefore, even though Base Rate may not have changed for 18 months, there is still every reason for savers to be proactive and ensure that they are getting the best return possible in this low rate environment. Now is the time for people to be squeezing as much value as they can from their savings by shopping around, utilising their full ISA allowance and switching to the best possible deal.”

THE RIGHT DECISION

The British Chambers of Commerce said the decision to leave interest rates unchanged was the right one.

“The government’s tough deficit-reduction measures, although necessary to repair the public finances, will increase the threat of an economic setback,” said David Kern, the BCC’s chief economist.

“Since sustaining the recovery must remain the priority, it is absolutely vital that the MPC maintains the current low level of interest rates until the middle of 2011 at the earliest.”

IMPACT ON STERLING

Duncan Higgins, senior analyst at Caxton FX, said: “The balance of arguments are continuing to keep the committee members on the sidelines for the time being.

Although the decision itself has produced no surprises, the minutes in a fortnight’s time may signal increased arguments in favour of extending quantitative easing. Amid signs that the UK economic recovery is slowing and with the spending cuts soon to start biting, the committee members may feel that the conditions for further monetary stimulus are getting closer.”

“Mirroring the low key impact of the decision, sterling has been left unchanged, continuing to trade around €1.20 and $1.54.”


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