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Bank set to leave rates unchanged

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  • Bank set to leave rates unchanged

    Bank set to leave rates unchanged

    Rate-setters slashed borrowing costs to a record low of 0.5% and embarked on unprecedented plans to boost the economy with £75 billion in newly-created money in March.
    But the Monetary Policy Committee (MPC) is likely to wait several months before shifting rates again while the 'medicine' works on the UK's recession-hit economy.
    JP Morgan economist Malcolm Barr said: "Looking further forward, we continue to anticipate rates remaining at 0.5% for an extended period of time - in our forecasts that means until early 2011."
    With further cuts unlikely due to the potential impact on banks' margins and their willingness to lend, the focus will shift to the pace of its programme of quantitative easing (QE) - effectively printing money.
    The Bank - which has permission from Chancellor Alistair Darling to create up to £150 billion if necessary - will review the scale of the operation each month, but it will be difficult for rate-setters to judge the impact of QE just weeks into the process.
    The Bank's latest credit conditions survey, however, showed lenders indicating they would make more credit available to individuals and businesses in the coming three months.
    Other factors which will be weighed up by the MPC include a surprise rise in inflation during February - although this was put down to the weakness of sterling - and the Consumer Prices Index, which is set to fall well below the Bank's 2% target this year as recession bears down on demand.
    Although experts predict a fall in output during the first three months of 2009 of the same order as the 1.6% fall seen in the final quarter of 2008, surveys from manufacturing, services and construction sectors have all signalled that the break-neck pace of the UK's slump into recession is at least slackening off.
    Mr Darling has admitted that he got the length of the slowdown wrong when he predicted a "short and shallow" recession in November. He now faces the prospect of downgrading growth forecasts again in the Budget later this month.

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