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October 7, 2010    

UK interest rates and QE remain on hold

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by Kay Murchie

The Bank of England’s Monetary Policy Committee (MPC) has today elected to keep UK interest rates on hold at the historically low level of 0.5% – where they have been since March 2009.

Furthermore, the Bank opted not to inject any more funds into the economy via its quantitative easing (QE) scheme – introduced to stimulate growth within the economy.

Both moves were widely expected.

At the last four meetings, policymaker Andrew Sentance voted for rates to rise from their historic low and, once again, he is expected to have voted for a rate hike today because of concerns about inflationary pressures.

The move to hold rates comes despite stubbornly high inflation. The CPI inflation rate currently stands at 3.1% – the ninth consecutive month that inflation has been above the 2% target.

The CPI inflation rate is a benchmark for the MPC but Mervyn King, the Bank’s Governor, has already dismissed fears that higher inflation would demand a significant rise in interest rates in the months ahead.

Minutes of the two-day meeting will be released on 20 October.

Returning to the QE scheme, policymakers, Adam Posen and Martin Weale, have recently suggested injecting more cash into the economy, via the QE scheme.

According to Posen, more stimulus is required to help the recovery and to avoid a similar kind of slump which Japan experienced in the 1990s.

The Bank embarked on its £200 billion QE programme in March 2009, when the economy was in the midst of its worst recession in more than five decades.

Yesterday, the Institute of Directors (IoD) said he Bank should inject a further £50 billion into the economy.

Graeme Leach, IoD chief economist, said: “Monetary policy needs to help ensure a sustainable recovery is in place before the public sector recession begins.”

In related news today, the Halifax has revealed UK house prices fell by a record 3.6% in September compared with August.

The latest house price fall takes the average cost of a UK home to £162,096, the Halifax said.

According to the lender, the monthly decline was the biggest since records began in 1983. However, it is still too soon to suggest that this is the start of a slump in house prices.

Also today, the Office for National Statistics (ONS) revealed UK manufacturing output grew by 0.3% in August compared with July – the highest gain since November 2008.

Not only was this better than the 0.2% rise expected by analysts, it follows the revised 0.4% gain in July.

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