The Bank of England has held off making any changes to monetary policy despite the weakening economic outlook for the UK.
At today’s Monetary Policy Committee meeting, policymakers voted to hold the base rate at its historic low of 0.5 per cent for the 41st month running and kept the quantitative easing programme at £375bn.
A preliminary estimate by the Office for National Statistics last month suggested that the economy contracted by 0.7 per cent in the second quarter while more recent business surveys point to a weak start to the third quarter for key sectors such as manufacturing and retail.
However, economists expected the Bank to keep monetary policy steady today, despite this deterioration in economic indicators.
Last month, the nine members of the MPC voted in favour of expanding QE, which is officially know as the asset purchase facility, by £50bn. This makes it unlikely that fresh QE will be announced until the current bout ends in November.
In addition, the minutes from the MPC’s July meeting imply that the Bank will wait until the Funding for Lending scheme – which started yesterday – is deemed a success or not before putting further interest rate cuts back on the table.
IHS Global Insight chief UK and European economist Howard Archer says: “It is likely … that the MPC will assume that the 0.7 per cent quarter-on-quarter GDP contraction in the second quarter significantly overstates the economy’s weakness due to a number of factors (notably the extra day public holiday resulting from the Queen’s diamond jubilee celebrations and the wet weather hitting retail sales and construction activity).
“The MPC will therefore probably want to see widespread evidence of how the economy is performing in the third quarter before seriously considering more stimulative action.”