Bank of England Keeps Rate at 0.5%, Raises Asset Purchase Programme to £32b

June 11, 2012 /

The Bank of England’s Monetary Policy Committee last week voted to maintain the official bank rate paid on commercial bank reserves at 0.5% and to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.

In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries.

A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy, according to BoE. But the drag from tight credit conditions and the fiscal consolidation together present a headwind.

KPMG Chief Economist, Andrew Smith, said: “With the economy showing no sign of recovery and the Monetary Policy Committee’s central forecast predicting inflation will trend back to target within two years, it is a bit surprising that the MPC has chosen to sit on its hands again.

“Economic data will be distorted this quarter and next by the Jubilee holiday and upcoming Olympics, so amongst all the noise it will be difficult to ascertain the underlying state of the economy. But the big picture is that output has been essentially flat for the past 18 months and there is no reason to expect any significant change in the short term.

“While QE is no silver bullet, the probability of weak growth (at best), and the confirmation that inflation has resumed its downward trend, is likely to lead the Committee to conclude that more stimulus is worth another shot, and sooner rather than later.”

The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.

CPI inflation has fallen back from its September peak, declining to 4.2% in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison. Inflation is then likely to decline further as the contribution of energy and import prices diminishes, while downward pressure from unemployment and spare capacity continues to restrain domestically generated inflation.

UK’s business organization CBI responded to the announcement from the Bank of England’s Monetary Policy Committee.

Anna Leach, CBI Head of Economic Analysis, said: “Both official and survey data continue to present a mixed picture of the economy, so this decision would have been a tricky one.

“It seems that a ‘wait and see’ position has been adopted for the moment. The ongoing crisis in the Euro area will continue to put pressure on fragile business conditions for the foreseeable future. But we still expect the UK economy to improve modestly later in the year, with further falls in inflation providing some support to family incomes.”

In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term.

The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review.

 

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