Bank of England keeps interest rate at record low

LONDON, United Kingdom – The Bank of England voted on Thursday, February 7, to freeze its key interest rate at a record-low 0.50% and maintain its quantitative easing cash stimulus as Britain stands on the brink of another recession.

“The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.50%,” it said, adding that QE would remain at £375 billion ($589 billion, 434 billion euros).

The central bank added in a longer-than-normal statement that overall economic activity had been “broadly flat” over the past year, despite worries that the British economy could be heading for the third recession in five years.

The QE stimulus program has been used to try and help prop up Britain’s economy, which unexpectedly shrank by 0.3% in the final quarter of 2012. However, the economy flatlined over the entire year with zero growth.

“Over the past year, there has been considerable volatility in quarterly output growth,” the central bank said in the statement.

“Looking through the influence of temporary factors, overall output appears to have been broadly flat. In large part that reflects sharp falls in particular sectors of the economy that are unlikely to be repeated in 2013.

“In contrast, the combined output of the manufacturing and services sectors has grown modestly. Business surveys suggest the pace of expansion is likely to remain muted in the near term,” the BoE added.

The central bank that 12-month inflation would rise further in the near-term and could remain above its 2% target for the next two years. However, it was then forecast to return to to “around” the target level as price pressures fade.

Policymakers also mulled withdrawing QE stimulus, in order to pull inflation lower, but decided that it would risk endangering any recovery. QE can risk stoking inflation and is more commonly referred to as printing money.

“The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation,” it said, adding it was necessary to look beyond the period of above-target inflation.

“Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.”

Thursday’s decisions were in line with expectations and came as incoming BoE governor Mark Carney called for the bank to ready plans for a smooth eventual withdrawal of QE stimulus to avoid major disruption on markets.

Canadian central bank chief Carney — who takes the helm from current BoE boss Mervyn King in July — set out his views on QE before a group of cross-party lawmakers on parliament’s Treasury Select Committee.

“The bank will need to design, implement and ultimately (manage an) exit from unconventional monetary policy measure in a manner that reinforces public confidence,” Carney said in written testimony to the committee.

“The exit needs to be achieved without disrupting the gilts (bonds) market,” he added ahead of the latest decision.

Quantitative easing (QE) involves creating cash to buy assets like government and corporate bonds, with the aim of boosting lending by retail banks and stimulating economic activity.

The BoE’s main lending rate has stood at the record-low 0.50% since March 2009, when it also embarked upon its radical stimulus policy.

Under QE, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds with the aim of increasing lending by retail banks and boost economic activity. – Rappler.com