Banking News Interest Rates Stick Or Twist Bank Expected To Hold Steady At 0 5 Percent 3190

Interest rates stick or twist? Bank expected to hold steady at 0.5%

07 April 2009 / by Rebecca Sargent
The Bank of England is due to make its next base interest rate decision this Thursday, and analysts are expecting the Bank to “bring the curtain down on the interest rate cutting show.”

The Bank of England’s Monetary Policy Committee (MPC) has cut interest rates six times in the last six months, taking the rate from five per cent to a 315 year low of 0.5 per cent.

However, chief UK economist at Global Insight, Howard Archer believes that further cuts are unlikely. “The MPC members have made it very clear that they are reluctant to bring interest rates down below 0.5 per cent, primarily due to the negative impact that this would have on the banks’ spreads and profitability, and hence potentially their lending,” Mr Archer said.

He added: “There is also a suspicion that a further interest rate cut would not be greatly passed on, and would therefore have limited beneficial impact, while it would further hit savers.”

As a result, economists at Global Insight expect the Bank base interest rate to remain at 0.5 per cent into 2010, as GDP in the UK is expected to contract further before the economy stabilises.

Instead of focussing on interest rates, they believe that quantitative easing has come to the forefront of Monetary Policy. Mr Archer added: “Quantitative easing is clearly now at the forefront of the Bank of England’s attempts to stimulate economic recovery, not only because the key interest rate is unlikely to come down further, but also because the lack of availability of credit remains a major concern.

“The Bank of England is also hoping to bring down longer term interest rates through its quantitative easing program.”

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Written by Editorial Team