Bank of England Holds Rates at 0.5%

The Bank of England’s monetary policy committee agreed on Thursday to hold interest rates steady for the first time since last September and maintained its commitment to buy up to £150bn in gilts and corporate bonds., Financial Times 4/9/2009 7:08:39 AM

The decision to keep interest rates at 0.5 per cent was widely expected, after rates had been cut by a total of 4.5 percentage points in the six meetings of the MPC since September.

The move comes amid fears that further rate cuts would hit banks’ spreads and profitability, which could affect their ability to lend, and that they might not be passed on.

The committee also agreed to continue with the programme of quantitative easing – creating central bank reserves mainly to buy up gilts – that it began after the last meeting.

The fact that the committee did not move to change the amount of assets it will buy suggests that the Bank believes that it is too early to gauge the effectiveness of the policy, and that the economy has not drastically deteriorated beyond its expectations.

In a short statement the Bank said the committee had voted to continue with the programme, announced on 5 March, of asset purchases totalling £75bn financed by the issuance of central bank reserves.”

The committee noted that since its previous meeting a total of just over £26bn of asset purchases had been made and that it would take a further two months to complete that programme.”

Almost all of the assets bought so far have been gilts, with only a small amount going to commercial paper and corporate bonds.

The Bank believes it is still early to judge quantitative easing – Mervyn King, the governor, said recently that six months was a reasonable time over which to assess quantitative easing’s effectiveness.

However, initial sharp falls in yields on government bonds after the Bank began buying up assets have been substantially reversed.

The rise in yields comes amid fears about the mounting levels of UK government debt, an increase in inflation expectations and improved risk appetite, which naturally reduces demand for gilts.

Quantitative easing is aimed at boosting credit and raising the cash value of spending in the economy – known as nominal spending.

The Bank’s view is that nominal spending should rise by about 5 per cent a year for the MPC to hit its inflation target. But the most recent figures on spending show that it barely grew in the fourth quarter.

Bank of England Holds Rates at 0.5%