Bank of England maintains Bank Rate at 0.5%

The Bank of England has maintained the base rate of interest at 0.5% and has made no changes to the size of the Asset Purchase Programme (the stock of asset purchases financed by the issuance of central bank reserves) at £200 billion

In a statement, the Bank of England said:

“CPI inflation has risen sharply to well above the 2% target, reaching 2.9% in December. That rise was largely accounted for by higher petrol price inflation and the reduction in the main VAT rate a year earlier dropping out of the calculation. Inflation is likely to have risen further in January, reflecting the restoration of the VAT rate to 17.5%. Pay growth has remained subdued.”

“The considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity. But credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending. On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity. The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.”

“In the light of the Committee’s latest Inflation Report projections and in order to keep inflation on track to meet the 2% inflation target over the medium term, the Committee judged that it was appropriate to maintain Bank Rate at 0.5% and its stock of purchases of government and corporate debt financed by the issuance of central bank reserves at £200 billion. The Committee noted that this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come. The Committee will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.”

Barry Naisbitt, Chief Economist, Santander UK, commented:

“With Bank Rate held at a record low of 0.50%, the MPC has been operating its quantitative easing policy in conjunction with the very low level of rates and watching the incoming economic data very carefully to see how it is tracking against its expectation of the likely development of inflation and output. Some recent indicators, particularly survey indicators of output, are now presenting a more positive picture of economic activity, although the current figures show that GDP in the fourth quarter of last year only rose by 0.1%. The MPC will be watching how the New Year trading period goes and the Inflation Report, published next week, will give a new reading on how the Bank of England expects economic events to unfold this year.”