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Interest rates remain at historic low

07 November 2009 / by Andy Davies

The Bank of England's decision to keep the Base Rate at the historic low of 0.5 per cent for the eighth consecutive month, and pump an additional £25billion into the economy has been met with a mixed reaction by some experts and providers.

According to the latest Monetary Policy Committee (MPC) Inflation report, it expects inflation to rise sharply above the Bank of England target of two per cent in the near term, which the B of E say would result in higher petrol price inflation and the reversal of last year's reduction in VAT.

Following this report, the MPC has ruled that maintaining interest rates at 0.5 per cent was appropriate in order to keep inflation on track to meet the two per cent target over the medium term.

Commenting on the announcements made by the B of E, Robert Sinclair, director at the Association of Mortgage Intermediaries believes this reveals the "fragile nature of the UK economic recovery".  

"With the expectations that inflation will rise in the short term, the Bank still increased the Quantitative Easing programme, indicating that they remain concerned that the recovery is still struggling to gain traction," he said.

Although welcoming that these changes will "support the broader economy", Mr Sinclair says "more needs to be done to bring the mortgage market back to a more normal size and underpin the stability we are now seeing in property prices".

Legal & General's director of mortgages, Ben Thompson agreed saying that the B of E announcement will lead to a "temporary supply-led recovery" instead of the desired "long-term demand-led recovery".

David Kuo, director at The Motley Fool, has warned that the decision to keep interest rates the same and pump more money into the economy could lead to a "gradual slide in the value of the sterling".

"Investors should therefore consider investing in overseas assets rather than scratch around looking for better savings accounts in the UK which are much of a muchness.

"There are a number of ways that investors can gain overseas exposure. These include investing in British companies that generate some or most of their profits outside of the UK," he said.        

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