April 9, 2009
Interest Rates Expected To "HOLD"
The Bank of England is expected to announce later today that it is to keep interest rates at their of 0.5 per cent while it assesses the impact of its moves to revive the economy through quantitative easing.
Mervyn King, the Bank’s Governor, had made clear last month that he saw little scope for further cuts following six successive interest rate cuts since October, reducing borrowing costs from 5 per cent to 0.5 per cent.
However, it is hoped that the Bank will give some indication of whether the first stage of its quantitative easing plan to pump extra, newly-created money through the economy by buying up a range of assets from the financial markets is having any impact. The Bank is widely expected to order no change for the moment in its quantitative easing plan.
The move to buy assets worth a total of 75 billion pounds over three months began only last month, and is less than a third complete, with the Bank having so far purchased some 20 billion pounds of UK government bonds or gilts, and about 400 million pounds of corporate bonds.
The Bank said when it announced the scheme that the Monetary Policy Committee would review the operation and effectiveness each month and adjust the scale of its action if needed. But with the rate-setting committee having so far had little chance to tell whether the plan is proving successful no significant adjustment today is anticipated.
Expectations that the interest rate will remain at 0.5 per cent follow a series of optimistic signs that the economy may have begun to emerge from the sharpest phase of the recession.
Consumer confidence has risen for two months in a row, and there have been indications that the crash in the housing market is easing, with mortgage approvals increasing from very low levels for several months. The Nationwide Building Society also reported that house price rose by 1.9 per cent last month, although the Halifax reported a continued fall in home values.
More positive, too, have been surveys from both the Bank itself and the CBI suggesting that the extraordinarily tight credit conditions facing businesses have relaxed a little. The Bank’s latest credit conditions survey showed that lenders plan to more credit available to individuals and businesses in the coming three months
Key surveys of services and manufacturing have shown that the pace of decline in both sectors also eased last month.
The slightly improved news on Britain’s economic fortunes will have reassured the MPC that its medicine may be starting to work. Last month, Mr King sought to boost confidence, emphasising that: “In its entire history, the Bank has never acted so swiftly or extensively in response to an economic downturn.”
But the recent upsurge of optimism that a recovery might emerge before the end of the year was dealt a new blow as a bleak poll from Reuters showed that City economists have downgraded their expectations of UK prospects for a fifteenth consecutive month. The average City forecast is now for Britain’s GDP to plummet this year by 3.6 per cent, in what would be the economy’s worst year since the end of the Second World War.
According to IHS Global Insight economist Howard Archer: “The UK clearly currently remains deep in contraction territory with a return to growth still looking some way off.”
SOURCE:TELEGRAPH
