Base rate held and no QE

Sarah Davidson

November 4, 2010

Minutes from October’s MPC meeting revealed a three way split on policy with Andrew Sentance voting to raise the base rate, Adam Posen voting to extend quantitative easing and the remaining members voting for no change.

There had been some speculation in the market earlier this week that the Bank might decide to print more money this month to stimulate the economy.

But following stronger than expected GDP growth of 0.8% in the third quarter the MPC has delayed further quantitative easing.

Barry Naisbitt, chief economist at Santander UK, said: “A familiar story – there was no change from the MPC on rates again today. However, after last month’s three way split vote, financial markets will be looking to the minutes of the meeting and, more particularly, the Inflation Report to get a better sense of how the MPC is now thinking.

“For the past few months one MPC member has been voting to raise rates and last month another member voted for more quantitative easing. With inflation still well above its target and the increase in GDP in the third quarter ahead of market expectations, it will be interesting to see if the voting pattern changed.

“As usual, the key to this month’s decision will have been how the MPC judged the prospects for inflation and the economy generally. The US Federal Reserve has just announced more quantitative easing, reflecting the lack-lustre recovery and continued very high unemployment.

“The future for the UK economy remains uncertain and there are concerns about a weakening of growth ahead, so the MPC still has its foot hard down on the accelerator pedal. The Inflation Report is likely to give us a better indication of whether it is likely to ease back a little or if it is more likely that it will press down even harder. “

Richard Sexton, business development director , e.surv chartered surveyors, said: “The MPC’s decision to maintain the bank rate makes a lot of sense and reflects the continued vulnerability of the global economy and the domestic housing market.

“Given the positivity of recent GDP figures and the fact that inflation is so far above target, it is understandable the MPC has chosen not to launch QE2.”

Eric Stoclet, managing director of Crown Mortgage Management, said: “We need to keep the bank rate down and hold fire on quantitative easing. Andrew Sentance is wrong to insist on a rise in the bank rate.

“At present, the low rate is helping to cover up the negative equity swilling around the balance sheets of many of the UK’s lenders. The Posen vote in favour of cracking a bottle champagne across the bow of QE2 is also misguided.

“We don’t need QE2 at the moment – just look at the latest round of GDP figures.”

Paul Hunt, managing director of Phoebus Software, added: “We certainly don’t need to lower rates further – because we are clearly not in double dip territory. But neither should we raise them in a knee-jerk reaction to rising inflation. Inflation is being maintained above the target rate for a reason – it is helping the recovery.

“I feel we are now getting towards a position where QE is required with the imminent impact of both the VAT increase to 20% from January and also the austerity measures starting to kick in from early next year.

“There is a very real danger that inflation could fall rapidly over the next few months and head dangerously towards negative territory. The MPC needs to address this but they are running out of time.”

The MPC first dropped the rate to 0.5% in March 2009, where it has remained since.

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