No surprises as interest rates stay at 0.5%

Posted on August 4th, 2011 | Categories - Financial News

As expected the Bank of England have left interest rates unchanged at 0.5% and announced no further quantitative easing (QE) measures.

In a separate move the European Central Bank (ECB) kept interest rates in the Eurozone at 1.5%.

The announcements come in a week of turmoil for the financial markets and the global economy, with worries about the levels of debt in the US, Italy, Spain and Greece at the forefront of many people’s minds.

UK interest rates

It is the 29th month in a row that the Monetary Policy Committee (MPC) has voted to keep interest rates at 0.5% sending a clear message that during this period of weak economic growth interest rates will be kept low with managing inflation a secondary concern. The Consumer Prices Index (CPI) stood at 4.2% last month, still well above the Bank’s 2% target.

Both the CBI and National Institute of Economic and Social Research have downgraded their growth forecasts for the UK for 2011 to 1.3%. The Bank is due to publish its’ latest forecasts next week and are widely expected to follow suit.

Further negative economic news came earlier this week when a survey by Markit/CIPS found that the manufacturing had contracted for the first time in two years. Although a survey by the same organisation later in the week showed a surprise upturn in the services sector.

Quantitative Easing (QE)

There had been some speculation that the Bank would recommence its’ QE program, particularly after the surprise news this week that the Swiss Central Bank had lowered interest rates earlier this week.

The Bank has not used QE as a tactic to stimulate the economy since February 2010; some experts believe that now could be the right time to embark on an expansion of QE.

David Kern, chief economist at the British Chambers of Commerce, said: “Every effort must be made to sustain the recovery. If the economy weakens further, the MPC should not hesitate to increase the QE programme.”

Reaction

As usual many savers will be dismayed with today’s announcement as they struggle to find a real return, above inflation, on their savings.

Borrowers though, particularly people on tracker deals or those thinking of taking out a fixed rate mortgage will be pleased to see interest rates remaining low.