No change to interest rates, no further Quantitative Easing

Posted on June 7th, 2012 | Categories - News

The Bank of England have left interest rates on hold and decided against extending the existing £325 billion program of Quantitative Easing (QE).

Despite the International Monetary Fund (IMF) calling for a cut in UK interest rates the decision to leave rates at 0.5% was hardly a surprise.

‘Wait & see’

The IMF also suggested that the Bank should extend the program of QE and some observers had predicted that this advice would be followed.

However it seems that the Bank has decided to adopt a ‘wait and see’, monitoring both inflation and the wider economy, before making their next move. At least one senior member of the Bank of England, Spencer Dale the Bank’s Chief Economist, believes that the economy is still feeling the effects of previous rounds of QE, which might further explain the ‘wait and see’ approach.

Anna Leach, Head of Economic Analysis at the CBI, said: “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.”

Winners & Losers

The main beneficiaries of today’s announcement are borrowers, especially mortgage holders with a loan linked to Bank Base Rate, who have seen their interest payments remain low for a further month.

Most savers will continue to see themselves as losing out as the Bank continues with the policy of record low interest rates.

Over the past few years savers have had to put up with all time low interest rates whilst trying to find savings accounts to beat inflation. Financial experts point out that there are still very few savings accounts which beat inflation, although if inflation continues to fall savers will find it easier to get a ‘real return’.

Would be retirees who plan to buy an Annuity have definitely lost out due to the Bank’s QE measures.

As the Bank buy more gilts the yield falls, pushing down Annuity rates, the flight to safety caused by the Eurozone crisis has compounded the problem and resulted in Annuity rates dropping by over 3% in May alone.

It will come as only small comfort to people buying an Annuity over the next few months that no additional QE was announced today.