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BoE expected to retain interest rates at 0.5% this week

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by Kay Mitchell
BoE expected to retain interest rates at 0.5% this week

Economists believe the Bank of England will keep interest rates at 0.5% on Thursday, bringing an end to the aggressive cuts it has implemented to bring inflation down and fight off a prolonged recession.

In as many months, interest rates have been cut six times, taking the rate from 5% to 0.5% – the lowest since the Bank of England was established 315 years ago.

According to Howard Archer of IHS Global Insight, further cuts are unlikely since members of the Monetary Policy Committee (MPC) have been vocal in the fact they are reluctant to go below the 0.5% level, “due to the negative impact that this would have on the banks’ spreads and profitability, and hence potentially their lending.”

Mr Archer believes a further rate cut would have little benefit since banks are unlikely to pass the cut onto borrowers but it would continue to impact negatively on savers.

After last month’s interest rate cut, it was announced that the Bank of England would implement quantitative easing (also known as printing money) – a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital. The aim is to increase lending levels in commercial banks.

Mr Archer believes that quantitative easing is now at ”the forefront of the Bank of England’s attempts to stimulate economic recovery“, rather than further interest rate cuts.

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News posted: April 7, 2009

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