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Bank freezes base rate – extends quantitative easing to £175bn

The Bank of England has frozen the base rate at 0.5 per cent and extended its quantitative easing programme with an additional £50bn to a total £175bn.

The Monetary Policy Committee’s latest decision means the base rate has been at this historic low for the sixth consecutive month.

John Charcol senior technical manager Ray Boulger says the quantitative easing increase shows the MPC still has major concerns over the state of the UK economy.

He says with fixed rate mortgages now pricing in future increases in base rate there is an argument for opting for a tracker, but ideally one that offers the flexibility of fixing at a later date, such as one that does not levy a hefty early redemption charge.

But he adds: “The initial reaction of the gilt market to the QE announcement was to drop yields across all maturities by about 0.17 per cent.

“If these lower yields are maintained into next week I would expect to see some reductions in the cost of fixed rate mortgages later in the month.”

Legal & General director of mortgages Ben Thompson says: “The Bank of England has not yet put its cheque book back in the drawer, having already comfortably outspent Manchester City 100-1.

“While Mark Hughes of Man City will want instant results on the pitch, Mervyn King will be looking more for a steady turnaround at a manageable pace.”

But Thompson also raises concerns that the programme could stoke the fires of inflation too much in coming years.

Liberal Democrat Shadow Chancellor Vince Cable says: “The Bank of England’s actions are a clear signal that the economy is not yet out of the woods, despite some minor signs of recovery.

“With thousands of businesses still struggling to get loans, the Bank’s decision to put more money into the economy is the right way to go.

“What is critical is that this further injection of money is done in tandem with more direct Government policy to help viable businesses get access to the credit they need to survive the recession.

“As financial institutions continue to hoard money, quantitative easing has not yet fed through to the rest of the economy. It’s vital that it does.”

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Value remains within European equities

By Rob Burnett, Neptune European Opportunities Fund

In recent months, investors have become more pessimistic about both the European and the US economic outlook and yet stockmarkets have pushed on to new highs. Some would argue that this is a worrying divergence. We would take the opposite view. This appears to be classic bull market behaviour. A wall of worry has been rebuilt, and stockmarket resilience should be taken as a sign of strength. The market is discounting an improving economic outlook ahead, particularly in the south of Europe.

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