The Bank of England’s Monetary Policy Committee has voted to keep base rate at 0.5 per cent for the 31st consecutive month but has decided to increase its programme of quantitative easing by £75bn to £275bn.
The last rate change was on March 5, 2009, when it was reduced from 1 per cent to 0.5 per cent. On the same day, the Bank of England initiated a £75bn QE programme.
The most recent change to the size of the programme, on November 5, 2009, was an increase of £25bn, bringing the total to £200bn.
Meanwhile, the European Central Bank has left interest rates unchanged amid the continuing debt crisis in the eurozone.
Benchmark rates were kept at 1.5 per cent for the third month, after being raised from 1.25 per cent in July in an attempt to cool inflation.
Santander chief economist Barry Naisbitt says: “With weak economic data recently both in the UK and in some of its main export markets and GDP growth in the second quarter now shown to have been just 0.1 per cent, further quantitative easing is seen as one mechanism to boost economic activity and confidence.
“So with the economy barely growing in the second quarter, households’ real incomes being squeezed by high inflation, consumer confidence ebbing away, and evidence of slowing output growth in some sectors, MPC members have today decided that the economy needed some more policy impetus to boost confidence and growth.”
Capital Economics chief European economist Jonathan Loynes says: “The MPC’s decision to re-launch its quantitative easing programme today confirms that the committee finally recognises that the major threat to the UK is renewed recession, not inflation. But previous experience suggests that the positive impact on the economy is likely to be modest.”
Schroders European economist Azad Zangana says: “In our view, the restarting of quantitative easing will boost confidence and asset prices in financial markets, but we remain sceptical over its power to restart lending, and therefore have a meaningful impact on the real economy.
“Where QE might have an impact is on Sterling. If the purchases of assets leads to a depreciation in Sterling, then this could boost demand for UK exports.”
John Charcol independent mortgage adviser John Charcol says: “Whilst an unchanged Bank Rate was very much par for the course, the MPC’s decision to increase QE by as much as £75bn, to be utilised over the next four months, suggests it is even more bearish on our economic prospects than most economists. Information on which the MPC will be particularly well-informed, compared to outsiders, is the health of the banking system in general and so this move is not encouraging in that context.
“Although the MPC is still forecasting the CPI will rise “above 5 per cent in the next month or so” it is also now being more positive in saying it expects CPI to undershoot the 2 per cent target in the medium term. Although, as the MPC highlights, the recently announced increases in utility prices will boost inflation in the short term the sharp falls in the price of oil and other key commodities over the last few weeks will help it fall in the medium term, along with the elimination of last January’s VAT increase from the calculation in the new year.”
Ignis chief economist Stuart Thomson says: “We do not believe that there will be a swift return to pre-credit crunch growth. Indeed, we believe that the UK economy will experience a decade of lost growth with real activity averaging just 1 per cent as the economy deleverages. The role of QE2 and its inevitable successors will be to offset the simultaneous deleveraging of the consumer, financial and government sectors.”