Bank of England maintains bank rate at 0.5% and increases quantitative easing

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by £25 billion to £200 billion.

According to the official report issued following the decision:

“The medium-term prospects for output and inflation continue to be determined by the balance between two opposing sets of forces. On the one hand, there is a considerable stimulus still working through from the substantial easing in monetary and fiscal policy. The Bank’s asset purchases have helped to boost asset prices and improve access to capital markets. The sterling effective exchange rate lies around a quarter below its mid-2007 level, improving the competitiveness of UK producers.”

“On the other hand, the need for banks to continue the process of balance sheet repair is likely to limit the availability of credit. And high levels of debt will weigh on spending. On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.”

Commenting on the news, Liberal Democrat Shadow Chancellor, Vince Cable said:

“The Bank of England clearly thinks that the economy is still a long way from recovery. As the UK is one of the last developed nations to still be in recession and with interest rates already at a record low, the Bank has few options other than extending quantitative easing.”

“While the Liberal Democrats support the principle of quantitative easing, it is clear that as banks continue to hoard liquidity, this money is not feeding through to the wider economy. There is now a danger that we are simply throwing more and more money at a problem with little evidence that it is having any positive impact beyond the financial sector.”

But Ray Boulger points out that the relative stability of savings rates has helped to avoid mortgage rates increasing.

“With the Bank Rate decision a foregone conclusion, the only question hanging over the result of this month’s MPC meeting was whether the QE programme would be extended and, if so, by how much. The MPC will have had sight of the draft Quarterly Inflation Report, to be published in 6 days time, and so today’s decision suggests there is unlikely to be much, if anything, in the Report in the way of optimism to counterbalance the depressing Q3 GDP figures showing that the UK remains in recession. Of course, time will tell, but the picture for mortgage borrowers looks a little brighter.”