Interest rates and QE held steady Go compare with our comparison table

Interest rates and QE held steady

04 November 2010 / by Paul Dicken

Interest rates have been maintained at 0.5 per cent and economic stimulus measures left unchanged, following the latest meeting of Bank of England policy-makers.

The Bank Rate has been 0.5 per cent for 20 consecutive months, with the quantitative easing (QE) programme left at its existing level. QE involves the Bank purchasing high-quality assets in the market to boost available funds in the financial system.

The decision by the Bank’s Monetary Policy Committee (MPC) to leave policy unchanged follows an announcement by the United States Federal Reserve on 3 November to embark on a new round of QE, dubbed QE2.

The Federal Reserve will purchase $600billion worth of US government bonds over the next eight months as it seeks to boost an economy suffering from high unemployment and a troubled housing market.

The losses for the Democrat party in mid-term elections this week were largely attributed to the Obama administration’s perceived failure to significantly improve the state of the US economy.

Responding to the MPC’s decision, Gary Naisbitt, chief economist at Santander UK said after a split in the vote at last month’s meeting, financial markets would be looking at the latest minutes, but more particularly the inflation report.

 “As usual, the key to this month’s decision will have been how the MPC judged the prospects for inflation and the economy generally. The US Federal Reserve has just announced more quantitative easing, reflecting the lacklustre recovery and continued very high unemployment. The future for the UK economy remains uncertain and there are concerns about a weakening of growth ahead, so the MPC still has its foot hard down on the accelerator pedal.”

Ray Boulger of John Charcol mortgage advisers said the MPC would be estimating the impact the government’s comprehensive spending review would have on the economy next year, and while keeping interest rates at 0.5 per cent was widely expected some doubt remained on whether the Bank would embark on further QE.

“Furthermore should the MPC in due course decide to extend its QE programme the later it does so the more the likelihood of a Bank Rate increase in 2011 diminishes,” Boulger added.

Federal Reserve decision

Commenting on the decision by the Federal Reserve to inject fresh money into the US financial system, Toby Nangle, director of the multi asset and fixed income teams at Barings Asset Management, said: “In our view, this is one of the greatest policy mistakes in the Fed’s history. Certainly, the first round of QE worked: it addressed a huge liquidity problem with a major liquidity solution.

“Two years on, the principal problem in the United States is one of solvency and growth rather than liquidity.”

Nangle said rather the economy faced ‘huge headwinds’ in the form of high unemployment and continued issues with the housing market.

“It appears that the Fed is gambling that the so-called portfolio balance channel effect – pushing money out of government bonds and into other assets – will lift risk asset prices and cause the dollar to fall, thus boosting the US economy and essentially scaring the prudence out of savers,” he said.

Nangle added that the gamble was on whether this would boost profits and wages, rather than simply prices, which would be counter-productive.

He expected the market trends, with investors maintaining an appetite for risk to remain unchanged in the short term, as the Fed announcement had been expected.

© Fair Investment Company Ltd

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