Thursday, the Bank of England decided to maintain its key interest rate at a historical low and to continue with its scheme of asset purchases financed by the issuance of central bank reserves. The central bank raised the size of the scheme by GBP 50 billion to GBP 125 billion.
The Monetary Policy Committee of the central bank decided to retain the Bank Rate at 0.5% as expected. The rate now stands at its lowest level since the central bank was established in 1694.
In the light of that outlook and in order to keep CPI inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate, the BoE said.
The central bank is set to release the minutes of the two-day rate setting meeting on May 20.
Raising the size of the asset purchase plan, the Committee said it expects to take another three months to complete the programme and it will keep the scale of the scheme under review.
The Treasury had already authorized an increase in the scale of asset purchases of up to GBP 150 billion, out of which GBP 50 billion was earmarked for purchase of private sector assets.
Consumer price inflation had fallen to its lowest level in a year in March, with annual inflation at 2.9%. The central bank is of the view that weakness in sterling added upward pressure on inflation, but increase in spare capacity in the economy and loosening labor market contributed to a sharp slowing in pay pressures.
Pulled down by food and energy prices, CPI inflation is expected fall below the 2% target later this year, the central bank said. The considerable margin of spare capacity is expected to bear down on inflation thereafter.
Further, monetary and fiscal policy easing and the substantial depreciation in sterling along with falling commodity prices would act as stimulus. These stimulus should in due course lead to a recovery in economic growth, bringing inflation back towards the 2% target. But the timing and strength of a recovery is highly uncertain, the central bank said.
In the fourth quarter, the British economy had slipped into its biggest contraction since the third quarter of 1979. The gross domestic product declined 1.9% in the first quarter.
According to the Spring Forecast of the European Commission, the British economy would possibly shrink 3.8% in 2009, before recovering by a slight 0.1% next year. The Organization for Economic Co-operation and Development expects a 3.7% contraction this year after expanding 0.7% in 2008.
Commenting on today's decision, the British Chambers of Commerce said alleviating the recession must be the immediate priority and this means the MPC must execute the quantitative policy more forcefully. David Kern, Chief Economist at BCC said a bigger proportion of the funds should be allocated to purchasing private sector paper.
Director-General of the BSA, Adrian Coles said the decision was no surprise. With the general economic outlook remaining bleak, we hope that the expansion of the quantitative easing programme will help to lessen the severity of the downturn, Coles added.
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