Page last updated at 11:36 GMT, Thursday, 10 September 2009 12:36 UK

UK interest rates remain on hold

Interest rate graph

The Bank of England has held interest rates at the record low of 0.5% for the sixth consecutive month.

It has also said it would continue to pump up to £175bn into the economy - so-called quantitative easing - but that it would not extend the programme.

Recent data has suggested that the UK has begun to climb out of recession.

But the Bank has warned recovery will be "slow and protracted" and that it will take months for the full impact of its policies to be felt.

'Rhetoric and reality'

Most commentators said the decision to leave rates, and the approach to quantitative easing, unchanged was sensible.

"If you look at survey data, you see the signs of green shoots, but if you look at hard numbers on the real economy, green shoots are much more difficult to see," said Graeme Leach, Chief Economist at the Institute of Directors business group.

"There is a clear divergence at present between the rhetoric and reality of recovery. This situation will change, recovery will come, but just as the private sector recession ends, the public sector recession will be only just beginning."

One must now question the conventional view that cutting rates below 0.5% will not help
David Kern
British Chamber of Commerce

No changes in policy were expected until at least November, said Hetal Mehta, senior economic adviser to the Ernst & Young Item Club.

"With the economy still weak and inflation projected to remain well below target for a prolonged period of time, interest rates are not heading up any time soon," she added.

Stagnation

Optimism about the outlook for the UK economy has pushed the FTSE 100 index above 5,000 points for the first time since October 2008.

Official data this week showed that UK manufacturing output rose at its fastest rate in 18 months in July.

Respected researchers the National Institute of Economic and Social Research also said the UK economy grew 0.2% in the three months to August.

But it said that a return to growth should not be confused with a "return to normal economic conditions".

"There may well be a period of stagnation now, with output rising in some months and falling in others," the institute said.

Economy boost

The aim of quantitative easing is to encourage individual banks to expand their balance sheets - moving their reserves into something that offers a higher return, such as making new loans - and so increasing the supply of money in the economy.

Bank of England building
The BoE extended its stimulus programme to 175bn last month

The Bank's Monetary Policy Committee (MPC) last month increased the size of the the programme by £50bn to create up to £175bn on the UK's balance sheet by, in effect, printing money.

The bank cut interest rates to a record low of 0.5% in March in an attempt to boost lending in the economy.

But there have now been calls for the rates to be cut to less than zero in order to dissuade banks from holding onto the cash being pumped into the economy and lend it to individuals and companies instead.

"One must now question the conventional view that cutting rates below 0.5% will not help," said BCC chief economist David Kern.

"Persistent weakness in lending to businesses, particularly to small firms, poses serious risks to the early signs of economic recovery."

He added that "positive signs of recovery cannot obscure the risks of a relapse", and urged the rate-setters to raise the quantitative easing programme to £200bn to purchase more company debt."



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