There had been vague speculation it might loosen it further, but this proved wide of the mark.
The Bank’s Monetary Policy Committee kept UK base rates at 0.5%, the lowest level since the Old Lady of Threadneedle Street was created
in 1694.
It also said it would continue with its “quantitative easing” programme of boosting the UK money supply by a total of £175bn. This is being implemented through the purchase of government and corporate debt.
The pound was last night trading around $1.6685 – up more than one cent on its close in London on Wednesday.
Although the outcome of the MPC’s latest two-day monthly meeting was in line with the majority view in the City, there had been some noise that the committee might increase the amount by which it is boosting the money supply still further in an effort to stimulate bank lending.
The MPC only last month extended the scale of its quantitative easing programme from £125bn to £175bn. It yesterday reiterated that it expected this programme to be completed by November.
There had also been chatter ahead of the MPC’s latest statement on monetary policy that it might reduce the amount of interest paid to commercial banks for holding reserves at the central bank, to stop them hoarding money and force them to lend more to individuals and businesses. This strategy is favoured by the British Chambers of Commerce, but the MPC gave no indication yesterday that it was considering such a move.
David Kern, chief economist at the British Chambers, said: “Following last month’s welcome decision to increase quantitative easing to £175bn, we are not surprised that
the MPC has chosen to persevere with the current programme and keep interest rates at 0.5%.”
However, he added: “Persistent weakness in lending to businesses, particularly to small firms, poses serious risks to the early signs of economic recovery. As a temporary measure, the MPC should consider cutting the interest rate paid on deposits kept by commercial banks at the Bank of England, and in some circumstances make this rate negative. This might discourage hoarding of cash and encourage the banks to lend more.
“Positive signs of recovery cannot obscure the risks of a relapse. The economy is still fragile and the productive sector is vulnerable. We urge the MPC to raise the QE programme to £200bn and purchase more company debt.”
Stephen Boyle, head of group economics at Royal Bank of Scotland, hammered home his view that UK base rates would remain at a record low for at least another six months. They have been
at 0.5% since March.
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