Business World

Sunday 26 February 2017

Bank of England holds rate at 0.5pc

The Bank of England kept interest rates at their historic low of 0.5pc today amid gathering clouds over the UK economic recovery.

Policymakers also resisted calls to pump more cash into the economy as fears grow over the impact of the government's looming spending cuts.

But the decision is thought to disguise a three-way split emerging within the Bank's nine-strong Monetary Policy Committee (MPC) as rate-setters are torn between moves to tackle high inflation and support the economy.

Today's news of a shock 3.6pc slump in property prices during September added to recovery concerns. The Halifax figures showed the worst monthly drop since the group began compiling figures in 1983.

Calls have been growing for the MPC to launch another phase of quantitative easing (QE) to support growth.

The Bank has not changed rates for 19 months in a row, while it last increased QE last November, when it upped the programme by £25bn to £200bn.

The Institute of Directors (IoD) and British Chambers of Commerce are calling for a £50bn extension of QE before the end of the year.

Worries are growing that the private sector is not strong enough to lead the recovery once the government cuts kick in.

Support for more QE is increasing within the MPC, with a recent speech by rate-setter Adam Posen making clear he feels now is the time to pump more money into the economy.

He warned of a potential Japan-style "lost decade" of stagnant growth if further moves are not made.

But the Bank is also battling against stubbornly high inflation, which remained at 3.1pc in August - well above the Bank's 2pc target.

Economists believe the MPC was divided, with Mr Posen opting for so-called QE2 and Andrew Sentance voting once more for a quarter-point rise in rates to calm inflation.

The "no change" decision signals that the majority of MPC members want to gain a clearer picture of the economy.

Figures this week have muddied the water, with industry data from the service and construction sectors showing surprise increases in growth last month.

But a fearful outlook among firms suggests this is unlikely to be sustained after the UK government unleashes the full force of its public spending cuts.

While gross domestic product rose by 1.2pc in the second quarter - its fastest pace for nine years - economists believe this will have dropped to around 0.4pc to 0.5pc in the third quarter.

It will come as a relief to mortgaged homeowners that rates remain unchanged, and are unlikely to rise for many months yet, according to experts.

Halifax said low interest rates have improved the affordability of houses.

Typical mortgage payments for a new borrower have fallen from 48pc of average earnings in 2007 to 30pc in 2010, it added.

The hefty fall in house prices last month will also help bring homes back to more realistic levels.

Press Association

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