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Bank Of England Maintains Interest Policy For 11th Straight Month

Friday, February 05, 2010 GMT

By: Mike Campbell
The Bank of England surprised few analysts by holding the UK interest rate at its record low level of 0.5% for another month. What may have been more unexpected was that the bank called a halt, at least for the time being, to its policy of “Quantitative Easing”.

The programme has already injected £200bn of new capital into the UK economy. The bank stated its belief that these funds would "continue to impart a substantial monetary stimulus to the economy for some time to come". However, the bank went on to say that they would monitor the situation and would act should they deem it to be necessary. It is believed that inflationary pressure which is building within the UK economy may have precipitated the suspension of quantitative easing. Annualised consumer price increases for December came in at 2.9% which breaches the Bank of England’s target for inflation which they set as 2%.

The hike in prices was the fastest rate of increase seen within the UK for nine months. Whilst the UK has formally ended its recession by posting GDP growth figures for the last quarter of 0.1%, the expansion is far from convincing. The Bank of England will probably continue with its current interest rate policy well into the year. Whilst higher interests rates can be used to curb inflation, the move could stifle the recovery. Protecting the UK’s fragile return to growth will remain the bank’s top priority.

During Quantitative Easing, the bank created additional funds which were used to purchase government assets, such as bonds, from other banks although some other instruments were also purchased from larger financial institutions. The idea was that the banks and financial institutions could then lend this new money to business and individuals which in turn would boost the economy. Ultimately, when the crisis is over, the Bank of England will sell these investments and (in theory) destroy the £200bn that was originally created – meaning that the exercise was without cost.

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<h1>Bank Of England Maintains Interest Policy For 11th Straight Month </h1> Friday, February 05, 2010 By: Mike Campbell 
The Bank of England surprised few analysts by holding the UK interest rate at its record low level of 0.5% for another month. What may have been more unexpected was that the bank called a halt, at least for the time being, to its policy of &ldquo;Quantitative Easing&rdquo;. 
 
The programme has already injected &pound;200bn of new capital into the UK economy. The bank stated its belief that these funds would &quot;continue to impart a substantial monetary stimulus to the economy for some time to come&quot;. However, the bank went on to say that they would monitor the situation and would act should they deem it to be necessary. It is believed that inflationary pressure which is building within the UK economy may have precipitated the suspension of quantitative easing. Annualised consumer price increases for December came in at 2.9% which breaches the Bank of England&rsquo;s target for inflation which they set as 2%. 
 
The hike in prices was the fastest rate of increase seen within the UK for nine months. Whilst the UK has formally ended its recession by posting GDP growth figures for the last quarter of 0.1%, the expansion is far from convincing. The Bank of England will probably continue with its current interest rate policy well into the year. Whilst higher interests rates can be used to curb inflation, the move could stifle the recovery. Protecting the UK&rsquo;s fragile return to growth will remain the bank&rsquo;s top priority. 
 
During Quantitative Easing, the bank created additional funds which were used to purchase government assets, such as bonds, from other banks although some other instruments were also purchased from larger financial institutions. The idea was that the banks and financial institutions could then lend this new money to business and individuals which in turn would boost the economy. Ultimately, when the crisis is over, the Bank of England will sell these investments and (in theory) destroy the &pound;200bn that was originally created &ndash; meaning that the exercise was without cost. 
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