The Bank of England holds rates again

Robyn Hall

October 4, 2012

Under QE the central bank creates money and uses it to buy mainly government bonds to stimulate the economy.

Some analysts expect the amount of QE to be increased next month.

The Bank expects to have finished spending the latest tranche of £50bn of QE, which was approved in July, by 1 November.

Therefore quantitative easing will remain at its current level of £375bn.

Andrew McPhillips, chief economist at Yorkshire Building Society, said this month’s MPC’s meeting was expected to be a “formality”.

He said: “The Bank is now into the final month of the latest round of asset purchases and it arguably makes sense to complete this before announcing a further round of QE.

“However, the MPC will be disappointed by recent data releases, notably the I Purchasing Managers Index indicators, and this does increase the probability of a further round of asset purchases before the end of the year.”

McPhillips added if the MPC were feeling confident about the prospects of the Funding for Lending Scheme they could “hold back” and allow it to become the primary tool for providing stimulus

He said: “The maintained base rate of 0.5% is as expected, given that it was not even discussed at the September meeting. In my view, there remains little to no benefit from a cut to the Base Rate and comments from MPC members outside of the official minutes suggest that they still hold this view.

“The release of the minutes later this month will be of greater interest to those in the financial markets though, to see if the much speculated November base rate cut looks more or less likely.”

Ben Thompson, managing director of Legal & General Mortgage Club, said::”Savers have had a rough ride over the last few years as interest rates have dropped to all time lows.

“Furthermore since the launch of the Funding for Lending Scheme (FLS) we have seen savings rates drop a little further, so although there would have been the option today to reduce base rate from its current level, many would have questioned the merits of doing that, especially savers.

“So it’s no surprise that the headline rate remains unchanged, and the Bank will want to wait for further evidence of how the economy is performing, before it triggers any new round of Quantitative Easing.

“There will be a high level of interest in how the FLS is filtering through to businesses and mortgage borrowers as well.

There are many challenges ahead for the Bank, but for now it is vital to keep maximum stimulus in place to ensure that the UK can slowly pull itself into growth territory. It’s been a long road since the onset of the credit crunch, and there is still a long road ahead before we can breathe a sigh of relief, safe in the knowledge that the economy is growing properly again.”

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