RTTNews - Thursday, the Bank of England maintained its key interest rate at a historic low as expected and voted to continue with its asset purchase scheme to pull the economy out of deep recession.
At the end of two-day rate setting meeting, the Monetary Policy Committee maintained the Bank Rate at 0.5%, the lowest since the central bank was established in 1694. The previous change in the interest rate was a 50 basis points reduction in March.
The central bank will release the minutes of the meeting on June 17.
The central bank said it will continue with its bond purchases programme totaling GBP 125 billion using central bank reserves and expects that it would take another two months for the programme to be completed. The BoE said the scale of the programme will be kept under review.
In the last month meeting, the BoE had unanimously decided to raise the size of the asset purchase plan by GBP 50 billion to GBP 125 billion in order to increase the amount of money in circulation.
Commerzbank analyst Peter Dixon said he expects the BoE to wait until August before its next move on asset purchase. There are some positive implications of asset purchase plans. Three month Libor spreads over Bank Rate almost halved compared to levels prevailing three months ago. Further, corporate credit spreads narrowed to their tightest since last October. However, many surveys suggest that companies are still facing difficulty in accessing credit.
Dixon said the current policy does not directly force banks to lend the liquidity provided by the BoE. This would merely make it easier to do so. Again if banks continue to impose stringent criteria for lending, the additional liquidity might well remain in the banking system and would only find its way into corporate lending once the banking sector believes that it is safe to resume lending.
David Kern, Chief Economist at the British Chambers of Commerce said the MPC must up the tempo at which they execute quantitative easing while increasing the scheme's size beyond GBP 125 billion. Tackling the recession should be the priority, especially with rising unemployment and firms continuing to reduce investment, Kern added.
After the British economy entered its worst recession since 1979, annual inflation slowed in April to a level last seen in January 2008. Consumer price annual inflation stood at 2.3% in April. The BoE sees a slow recovery and expects inflation to stay below target in the coming few years.
Economic indicators are now pointing towards an improvement in economic activity. According to separate surveys conducted by Nationwide Building Society in May, house prices logged the largest increase since October 2007, while consumer confidence rose to a six-month high.
The CIPS/Markit Purchasing Managers' Index for the British service sector moved above the 50-mark in May to record a growth for the first time in a year.
But jobless claims are expected to increase in the economy. In an interview to BBC radio, David Blanchflower, a former MPC member said claims might increase around 100,000 a month for the next year or so.
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