Interest rates stay at 0.5% but Asset Purchase Programme gets extra £50billion

07 May 2009 / by Rachael Stiles
The Bank of England's Monetary Policy Committee voted today to keep interest rates at their record low of 0.5 per cent for a third month, but said that it is adding £50billion to the Asset Purchase Programme.

"The world economy remains in deep recession," the Bank said in its statement today. "Output has continued to contract and international trade has fallen precipitously."

The Bank said that despite the measures introduced by the world's governments, "The global banking and financial system remains fragile," but added that domestic and international data shows "promising signs that the pace of decline has begun to moderate."

In addition to keeping the base rate at 0.5 per cent, the MPC also voted to continue with its Asset Purchase Programme, a quantitative easing scheme which is intended to restore stability in the banking system using the issuance of central bank reserves; it will also increase funding for the scheme to a total of £125billion.

After months of cutting interest rates to stem rising inflation, RPI inflation has now gone negative, and CPI inflation fell to 2.9 per cent in March, still higher than the Treasury's target of two per cent, but the Bank of England predicts that it will drop below two per cent in 2010.

"In the light of that outlook and in order to keep CPI inflation on track to meet the 2% inflation target over the medium term, the Committee judged that maintaining Bank Rate at 0.5% was appropriate," the Bank said.

Keshav Thukaram, managing director of smartlandlord.co.uk, said that today's decision by the Bank illustrates that interest rates have no further part to play in bringing about economic recovery.

"Interest rates are no longer the answer to kick starting the economy or the housing market," he said. "Instead it is a waiting game to see if quantitative easing and a dramatic budget will spark demand. The picture is mildly optimistic in some areas - confidence is already returning to the housing market.

"But mortgage criteria remain restrictive, particularly for first time buyers and landlords, who have the most reason to jump into a market nearing the bottom. Without these vital groups returning to the market it will take longer to put a floor under housing transactions and price falls. It is essential more is done to free up mortgage availability for less mainstream borrowers."

James Caldwell, director at Fairinvestment.co.uk, said that the decision is bad news for pensioners.

"The news will come as another blow for pensioners who have been the long sufferers of the credit crunch so far. This time last year, pensioners were enjoying interest rates on their savings that were ten times what they are now, when the base interest rate stood at five per cent, now the average no notice savings account has a rate of just 0.65 per cent," he said.

"Many pensioners who have a pension linked to the retail price index (RPI) rely on their savings income to supplement their cost of living. And, as a result, many pensioners are now worse off than they were this time last year, and in the short term this is unlikely to change," Mr Caldwell added.

© Fair Investment Company Ltd