Base rate held at 0.5%

Former_MSE_Guy

This thread is to discuss the following news story:

Base rate held at 0.5%

inspector_monkfish

...as expected.

inspector_monkfish

LONDON, May 7 - The Bank of England issued the following statement on Thursday after it held rates unchanged at 0.5 percent and said it would continue with its programme of asset purchases financed by the issuance of central bank reserves and to increase its size by £50 billion to a total of £125 billion.


BOE STATEMENT

"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 £50 billion to a total of £125 billion.


The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously. The global banking and financial system remains fragile despite further significant intervention by the authorities. In the United Kingdom, GDP fell sharply in the first quarter of 2009. But surveys at home and abroad show promising signs that the pace of decline has begun to moderate.


CPI inflation was 2.9% in March, significantly higher than the 2% inflation target. Past falls in sterling have continued to put upwards pressure on inflation. But the degree of spare capacity in the economy has increased and the loosening in the labour market has contributed to a sharp easing in pay pressures. CPI inflation is likely to drop below the 2% target later this year, driven in part by diminishing contributions from food and energy prices. The substantial margin of spare capacity in the economy should continue to bear down on inflation thereafter.


The Committee noted that the outlook for economic activity was dominated by two countervailing forces. The process of adjustment in train in the UK economy, as private saving rises and banks restructure their balance sheets, combined with weak global demand, will continue to act as a significant drag on economic activity. But pushing in the opposite direction, there is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit. That stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of that recovery is highly uncertain.


In the light of that outlook and in order to keep CPI inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate. The Committee also agreed to continue with its programme of purchases of government and corporate debt financed by the issuance of central bank reserves and to increase its size by £50 billion to a total of £125 billion. The Committee expected that it would take another three months to complete that programme, and it will keep the scale of the programme under review.


The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 13 May.

Graham_Devon

From what I gather, it seems they may press ahead with the further 75bn QE. Just waiting till next weeks forecasts.

Chris2685

Why don't they raise the base rate so that it matches that of every other bank? I think a 3% base rate would make sense right now.

inspector_monkfish

12:27 07May09 UPDATE: BOE Unexpectedly Ups Quantitative Easing To GBP125B


By Natasha Brereton
Of DOW JONES NEWSWIRES

LONDON - The Bank of England's Monetary Policy Committee Thursday increased its bond-buying plan to GBP125 billion from GBP75 billion and kept its key interest rate at 0.5%, as it responded to the risk of serious economic decline.

The timing of the move was a big surprise. While many analysts had tipped the bank to increase its buying in the coming months, only two of 13 economists polled by Dow Jones Newswires last week had expected an immediate increase. All 13 analysts had forecast the MPC to keep rates on hold.

The bank's policymakers acknowledged there were "promising" signs that the contraction in the U.K. economy was beginning to abate. But the global banking and financial system are still "fragile" and the world economy remains in "deep recession," they noted.

Existing "stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of that recovery is highly uncertain," they said.

The U.K. economy shrank 1.9% in the first quarter of this year, marking the third straight quarter of declining output and the sharpest contraction since 1979, but a growing number of data suggest the decline may be starting to abate.

Between October and March, the MPC cut the BOE's Bank rate from 5.0%. The MPC believes that below 0.5%, the damage that rate cuts would do to the profitability of banks would outweigh any stimulus they would give to the economy.

The MPC therefore decided to embark on a policy of quantitative easing, buying mostly government bonds, and a smaller amount of corporate bonds and commercial paper, worth a total of GBP75 billion over the three months to early June, with freshly created central bank money.

inspector_monkfish

Chris2685 wrote: »

Why don't they raise the base rate so that it matches that of every other bank? I think a 3% base rate would make sense right now.

which other Banks have a base rate of 3% then?

Chris2685

Most of them are offering savings rates of around the 3% mark.

ad9898_3

inspector_monkfish wrote: »

12:27 07May09 UPDATE: BOE Unexpectedly Ups Quantitative Easing To GBP125B


By Natasha Brereton
Of DOW JONES NEWSWIRES

LONDON - The Bank of England's Monetary Policy Committee Thursday increased its bond-buying plan to GBP125 billion from GBP75 billion and kept its key interest rate at 0.5%, as it responded to the risk of serious economic decline.

I can't see any good coming from this in the medium/long term.

inspector_monkfish

Chris2685 wrote: »

Most of them are offering savings rates of around the 3% mark.

sorry, i thought you were talking about other central banks around the world

inspector_monkfish

ad9898 wrote: »

I can't see any good coming from this in the medium/long term.

maybe you should join the MPC then