RTTNews - Thursday, the Bank of England retained its key interest rate at historic low as expected, and decided to continue with its asset purchase scheme totaling GBP 125 billion by utilizing central bank reserves.
At the end of the two-day rate-setting meeting, the Monetary Policy Committee decided to hold the Bank Rate at 0.5% as expected. The rate now stands at the lowest since
the bank was established in 1694. The previous change in the rate was a reduction of 0.5 percentage points in March 2009.
The MPC expects the asset purchase scheme to take another month to complete. The central bank said it would review the scale of the program again at its August meeting, alongside its latest inflation projections.
The central bank will publish the minutes of the MPC meeting on July 22.
In June, all nine members of the MPC had unanimously decided to hold the key interest rate at 0.5% and to continue with its quantitative easing measures totaling GBP 125 billion using central bank reserves. Economists were widely expecting the central bank to increase the size of the scheme by another GBP 25 billion to the authorized GBP 150 billion in today's meeting.
The British Chambers of Commerce said they disagree with the decision not to use the final GBP 25 billion allotted to it. According to the Chief Economist of BCC David Kern, raising the program size is significantly important so as to underpin business confidence. Kern urged the Chancellor to increase the program by a further GBP 50 billion to GBP 200 billion.
Peter Dixon, analyst at Commerzbank said there is a definite sense of nearing the end of the QE policy and any possible expansion might be very limited in scope. Today's non decision regarding monetary easing can be seen as a pause to assess where it stand in the cycle.
Dixon said, There is nothing to stop the BoE from taking a break for a couple of months and resuming the program at a later date when circumstances may be more favorable to its success. Commerzbank assesses it is quite soon to make any objective judgments as to whether the policy of asset purchases has been a success.
The revised quarterly national account report downwardly revised the GDP for the first quarter. Accordingly, the economy shrank 2.4% sequentially in the first quarter, the largest contraction since 1958. Annually, first quarter GDP declined 4.9%, revised down from a 4.1% drop published initially. This was the biggest drop on record.
Though it is far too early to say that the recovery is secure, the business lobby BCC said the worst phase of the recession is over in the British economy.
Amid record contraction, consumer price annual inflation in May had eased slightly to 2.2%, the lowest since January 2008, but stood above the central bank's target for the 20th consecutive month. The central bank expects inflation to stay below target in the coming few years.
Yesterday, the Chancellor of the Exchequer Alistair Darling granted additional powers to Financial Services Authority and the Bank of England. In a statement to the Parliament, the chancellor proposed the creation of a new Council for Financial Stability, comprising the BoE, the FSA and the Treasury. This council is expected to monitor system-wide financial stability and respond to long-term risks as they emerge, on a formal statutory basis.
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