Page last updated at 16:55 GMT, Thursday, 9 July 2009 17:55 UK

Bank keeps interest rates on hold

Interest rate graph

The Bank of England's interest rate setters have kept the cost of borrowing unchanged at 0.5% for the fourth month in a row.

It added it was not planning to extend its quantitative easing scheme under which it creates money to buy bonds in order to stimulate the economy.

It will continue with its current plan to spend £125bn. Some had expected it would increase that amount.

But the move allows it to pause and assess economic data, observers said.

The Bank's Monetary Policy Committee (MPC) could have increased its quantitative easing spending by an additional £25bn without asking the Treasury.

Stephanie Flanders
Stephanie Flanders, BBC economics editor.

The MPC has deferred a major decision on the future of QE until the August meeting, when they will have the new economic forecasts in the Inflation report in front of them.

Many had expected them to authorise a further £25bn in purchases, to lessen market uncertainty in early August when the existing £125bn will have been spent.

They could then have discussed at the August meeting whether to ask the chancellor to underwrite purchases of more than £150bn, or to put the policy on hold.

It is interesting that they did not feel able to pre-announce any additional purchases under QE at this time, despite the risk of creating market uncertainty between now and August.

Clearly, they do not consider the continuation of the policy to be a done deal.

But the Bank did not announce an extension of the programme this month because it wanted to see whether it was working, said Bronwyn Curtis, head of global markets at HSBC.

"I don't think they know yet [whether quantitative easing is working]," she said.

"The other thing about pausing is that they can always do more if the economic data deteriorates again."

'Extension needed'

The British Chambers of Commerce said it disagreed with the decision not to use the extra amount available to try and further stimulate the economy.

"Quantitative easing is not yet fully effective and there is a strong case for raising the proportion of private sector assets that the MPC purchases," said the BCC's chief economist David Kern.

"It is important to significantly increase the programme's size, so as to underpin business confidence."

He called on the chancellor to extend the scheme by a further £50bn to £200bn.

Business group, the CBI, said it was too early to determine the effects of quantitative easing on the wider economy, but agreed more was needed.

"A further extension through the autumn is needed, and clear communication of the Bank's intentions throughout will be critical in order to prepare the markets," said the CBI's chief economic adviser, Ian McCafferty.

Market reaction

The decision to leave the quantitative easing programme unchanged prompted sterling to rise, as some short-term confidence returned to the currency.

Sterling rose 1.2% against the US dollar to $1.6253 while the euro fell 0.4% against the pound to 86.1 pence following the MPC's announcement, which had "caught the market off guard" according to Mark O'Sullivan, director of dealing at Currencies Direct said.

"However, if poor economic data continues to be released we would expect the Bank to announce further funds to help ease liquidity problems. "

The news that the Bank of England was not going to buy lots more government bonds, or gilts, reduced gilt prices.

QE explained in 108 seconds

'Overall caution'

Pegging interest rates at 0.5% had been widely expected.

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club forecast that it would be held at 0.5% into the middle of next year.

"It can barely go lower and... an increase at this stage is out of the question," she said.

Earlier this week, the British Chambers of Commerce (BCC) business group said that the worst of the UK's recession was over, but added that talk of a recovery was premature.

Latest official data showed the UK economy contracted by 2.4% in the first three months of the year, a decline not exceeded for 51 years.

Also, UK unemployment rose to 2.261 million in the three months to April. This was the highest level since November 1996.

There has also been some stabilisation in the housing market, and while prices fell in June from May, according to the Halifax, the annual rate of decline eased from 16.3% to 15%.

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