To pull the slumping UK economy out of recession, the Bank of England maintained its key interest rate at record low, as expected, and decided to continue its asset purchase programme.
At the end of two-day rate setting meeting on Thursday, the Monetary Policy Committee of the Bank of England decided to hold the interest rate at 0.5%. The interest rate now stands at the lowest level since the central bank was established in 1694. The BoE maintained the rate after slashing it for six straight months from 5% in September.
The MPC also decided to continue with the GBP 75 billion asset purchases programme utilizing the central bank reserves in order to boost lending. The central bank said it would take another two months to complete the asset purchase programme. Since its previous meeting a total of just over GBP 26 billion of asset purchases had been made, the MPC said.
The central bank is set to release the minutes of the meeting on April 22.
Last month, the BoE had unanimously voted to reduce the Bank Rate by 50 basis points to 0.5% and announced a programme of asset purchases of GBP 75 billion financed by the issuance of central bank reserves.
David Kern, Chief Economist at the British Chambers of Commerce said, Quantitative easing must be implemented in a more transparent way. According to Kern, British business is concerned that, in the face of a severe recession, quantitative easing has not been sufficiently effective so far.
The Building Societies Association commented that savers will be pleased that interest rates have been not cut further, but this will do nothing to help those who have seen income on their savings declining sharply in recent months. The BSA added that it will take some time before the effectiveness of the central bank policies becomes clearer.
Peter Dixon, analyst at Commerzbank said With interest rates at all-time lows and the policy of quantitative easing now well underway, the BoE has little choice but to sit on the sidelines in order to assess whether the measures put in place over the last six months are likely to be successful.
According to Credit Conditions Survey, the pace of decline of secured lending to the household sector moderated slightly in the first quarter and expects credit to expand in the coming quarter. At the same time, corporate lending activity expanded slightly and expects it to pick up in the second quarter. Commerzbank said it is unlikely that the quantitative easing measures announced on March 5 as the primary factor influencing the survey.
The latest Access to Finance Survey by the Confederation of British Industry showed that UK firms' pessimism regarding the credit availability lessened during the three months to March.
The British economy contracted in the fourth quarter at the fastest pace since 1980. The economy shrank 1.6% sequentially in the fourth quarter and entered the first recession since 1991.
The Organization for Economic Co-operation and Development expects the British economy to contract 3.7% this year after expanding 0.7% in 2008. Further, the jobless rate is estimated to rise to 9.5% next year from 7.7% in 2009.
In February, annual inflation accelerated to 3.2% mainly on weak sterling. BoE Governor, Mervyn King expects sharp decline in CPI inflation since its peak in September to resume in the coming months. In the Treasury Committee hearing, King said the outlook for inflation relative to the target would guide the timing of the return of interest rates to more normal levels.
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