Dr. Mike Campbell

The Bank of England has maintained its policy of offering a record low of just 0.5% interest since March 2009. The purpose of the policy is to provide businesses with access to “cheap” money thereby enabling them to expand and help the UK economy to grow. The policy has its critics. Some analysts believe that rates must rise to choke of inflation in the UK which stands at 4.5% - more than twice its target value of 2%. Whilst interest rate rises can be used as a tool to cool inflation, it comes at the price of subdued growth and that is a price the Bank is unwilling to pay right now. Proponents of the low interest policy argue that the UK government’s austerity measures will bring inflation down over time. This view is endorsed by the IMF which cautioned only this week that some nations may need to throttle back on their debt reduction policies to stimulate growth in their economies.

The UK performance (if you can call it that) for Q2 has been revised downwards from 0.2% to 0.1% by the Office for National Statistics. The UK Treasury has seized on the figures as evidence that the UK economy is still growing – and who could argue with them there?

The Bank of England Monetary Policy Committee has decided to take action to stimulate the UK economy (presumably, they are not as easily pleased as the Treasury) and have approved a further round of “Quantitative Easing” which will see £75 billion pumped into the UK economy. The funds will probably be used to by up government bonds and should reduce yields somewhat. The hope is that the injection of cash will provide more liquidity to the banking sector enabling them to lend to business.