UK interest rates remain at record low

As expected the Bank of England voted yesterday to keep interest rates on hold at 0.5%.

The Bank’s Monetary Policy Committee have not changed interest rates now since March 2009, and concerns about the state of the UK economy, along with nervousness about the Eurozone, led the vast majority of experts to predict that rates would be left on hold for a further month.

Quantitative Easing

Following the decision to pump a further £75 million into the economy in October the Bank also announced no further Quantitative Easing (QE) measures.

The Bank has previously indicated it will take until February to implement the QE announced in October; most experts therefore believe it unlikely further such steps will be taken before the New Year.

However, the British Chambers of Commerce were dismayed by the news and called for a massive £500 million extra in support for the economy.
Ian McCafferty, chief economic adviser of the CBI, said: “With the Bank’s current round of asset purchases likely to run into early next year, this decision to keep monetary policy on hold is in line with our expectations.”

He continued: “Developments in the Eurozone remain the key risk to the UK’s economic prospects. While there are encouraging signs that progress will be made at this week’s summit, it’s clear that the situation is at a critical juncture.”

It is also thought the MPC will want to wait and see whether inflation continues to fall before announcing more QE measures; many economists believe that QE can cause inflation, as the extra money produced works itself into the system. If inflation does indeed start to fall in 2012, as the Bank has consistently predicted, the MPC may be more inclined to try and boost the economy through additional QE.

Howard Archer, analyst at IHS Global Insight, confirmed this view: “Holding back on more QE until early 2012 also gives the MPC more time to judge whether inflationary pressures are easing, which some committee members believe is important for the Bank of England’s credibility before it goes further down the QE road.”

Savers

Although the news was expected savers will be disappointed that interest rates remain so low. It is currently impossible for a tax payer to find a traditional savings account which pays a rate of interest equal to inflation, meaning that even the best savings interest rates are losing money in real terms.

Many savers are doubly vulnerable as they have often retired on fixed incomes which are also being eroded by inflation.

Last week’s Autumn Statement gave no relief for savers who will have to hope that in 2012 inflation does indeed start to slow, as the Bank of England have predicted, this would at least slow down the rate at which their savings are being eroded.