Bank of England Keeps Bank Rate at 0.5%, Increases Size of Asset Purchase Programme by £50b

July 06, 2012 /

The Bank of England’s Monetary Policy Committee yesterday 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 £375 billion.

KPMG Chief Economist, Andrew Smith, said: “This latest tranche of QE reflects the Committee’s deep concern that, far from recovering, after flat-lining for two years the economy is in the middle of a renewed downward lurch. The technical recession at the turn of the year has extended into the summer and recent survey evidence points to further weakening to come. With inflation now rapidly falling back towards target, the decision was a no-brainer.”

UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed.

Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here.

“Effectively, the Bank has torn up the forecast it made only two months ago. With domestic demand set to be undermined as public spending cuts bite, and the eurozone crisis stymieing any chance of export-led growth, projections of ½ – ¾ % growth this year now look like pie in the sky,” Smith said.

“Renewed QE should provide some boost by holding down borrowing rates but is no silver bullet. More imaginative monetary policies – and perhaps even a fiscal stimulus – may be required to counteract the contractionary forces which are now gripping the economy,” he added.

The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.
CPI inflation fell to 2.8% in May and is likely to edge down further in the near term. Commodity prices have fallen, which should help to moderate external price pressures. And pay growth remains subdued. Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term.

At its meeting on the same day, the Committee agreed that the Funding for Lending Scheme, which would be launched shortly, was a welcome initiative. It also noted recent and prospective actions to ease liquidity constraints within the banking system. Taken together with reduced pressure on household real incomes, on the back of lower commodity prices, and the continued stimulus from past monetary policy actions, that should sustain a gradual strengthening of output growth.

But against the background of continuing tight credit conditions and fiscal consolidation, the increased drag from the heightened tensions within the euro area meant that, without additional monetary stimulus, it was more likely than not that inflation would undershoot the 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 £375 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The previous change in the size of that programme was an increase of £50 billion to a total of £325 billion on 9 February 2012.


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