Bank stays hand on new money and holds rate

Good news that interest rates have been held again as expected; not great news that they’re not expanding the Quantitative Easing program although they’re likely to do so after the next inflation report.  IHMO they should be increasing QE and at the same time reducing the tier 1 capital requirements thereby encouraging banks to increase their actual lending rather than just hoarding the cash – this is what China is doing quite effectively – encourage banks to hoard cash in the good times and to lend it to in the difficult times.

Gary Duncan, Economics Editor

“The Bank of England pegged interest rates today for a fourth month in a row and stayed its hand over any other changes in its recession-fighting strategy as it paused for breath in its battle to combat the slump.

The Bank held interest rates again at their existing 315-year low of 0.5 per cent as it weighs the impact of its expanded £125 billion drive to jump-start the economy with massive injections of newly-created money.

The decision by the Bank’s Monetary Policy Committee (MPC) to prolong last month’s “wait and see” stance surprised the City.

Many economists had predicted that the MPC would further extend its quantitative easing (QE) scheme to pump extra money into the economy through huge purchases of government and corporate bonds.

The Bank has already completed purchases of more than £100 billion in bonds under QE, and analysts had expected the MPC to increase spending to the £150 billion maximum authorised by Alistair Darling. Some had predicted that the Bank would seek the Chancellor’s authority for a still higher limit.

The Bank said that it would review the scale of QE at the MPC’s next meeting in August.

Instead, the Bank today fuelled uncertainty over its next move by keeping its policy on hold, and deferring any extension in QE until it completes its next set of quarterly forecasts next month.

The MPC’s verdict will unsettle markets, since it is bound to spark speculation that the Bank may now call an imminent halt to the quantitative easing strategy as signs accumulate that an economic recovery is starting to emerge.

But pressure on the Bank to expand QE still further is likely to persist following grim news last month that the economy suffered an even steeper first quarter slump than was thought, plunging by 2.4 per cent, rather than the 1.9 per cent that was previously estimated.

Despite hopes that conditions have since greatly improved, with a slew of indicators pointing to recovery taking hold, optimism over prospects was dealt a blow this week as manufacturing suffered an unexpected further decline.

Factory output fell by 0.5 per cent in May to a level not seen since 1992. The influential National Institute of Economic and Social Research estimated that this pointed to a further 0.4 per cent drop in GDP in the second quarter. If confirmed in official data due on July 24, that it would dash City hopes that the recession might already have ended last month.

The further expansion of the QE programme will fuel controversy over the policy, however, with critics warning that its results remain disappointing.

Some economists argue that much of the extra cash created under the scheme is being hoarded by banks that remain reluctant to boost lending to businesses and consumers, while another large part of the money is flowing abroad as overseas investors dump holdings of gilts.” (Gary Duncan, The Times) http://business.timesonline.co.uk/tol/business/economics/article6667803.ece

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