Business

UK interest rates kept on hold at record low of 0.5%

Media playback is unsupported on your device
Media captionThe BBC's Declan Curry looks at why interest rates matter

UK interest rates have been held at their record low of 0.5% by the Bank of England's Monetary Policy Committee.

Interest rates have been kept at 0.5% since March 2009.

The Bank did not announce any increase in its policy of quantitative easing. In October, the Bank said it would pump another £75bn into the economy.

The decisions were widely expected, and come amid concerns over the economy's strength due to weak consumer spending and the eurozone crisis.

Stagnation

Data released by the Office for National Statistics on Thursday pointed to a surprisingly sharp downturn in industrial output - including the manufacturing sector - in November last year.

Eurozone interest rates have also been left unchanged - at 1% - by the European Central Bank.

Meanwhile, retailers continue to report disappointing Christmas sales, with Tesco - the UK's biggest retailer - reporting a drop in festive sales in the UK.

Growth stagnated in the last three months of 2011, according to estimates by the National Institute of Economic and Social Research.

The research institute said growth in the last quarter was just 0.1%, enough to avoid the risk of a recession for the time being. But it means that output still remains 3.6% below its pre-recession peak.

However, a series of closely-watched surveys released last week suggested conditions had improved in December.

The latest purchasing managers' indexes indicated that the service sector had seen growth pick up in December, while the manufacturing sector contracted at a slower pace than the month before.

"The PMI business surveys showed the pace of economic growth picked up to a five-month high in December," noted economist Chris Williamson at Markit, the firm that produces the PMI surveys.

"Importantly, historical comparisons with the PMI and policy decisions suggest that the survey data have moved closer towards a neutral policy stance."

More QE?

Close attention is likely to be paid to the Bank's minutes from Thursday's MPC meeting, which will be published in two weeks.

They may provide a hint of plans for further quantitative easing (QE) - creating new money to buy up government debt and other financial investments from markets.

The Bank had already pumped £200bn of cash into the economy via QE between March 2009 and February 2010.

The Bank hinted last year that it would take until February to administer the latest £75bn expansion in its QE programme.

However, many economists expect a further £50bn-plus of QE once the current programme is complete.

The Bank may also be mulling other new policies to boost the economy. It is already cooperating with the government's "credit easing" plan to funnel loans to small and medium-sized businesses.

"Since the challenges facing the UK economy will increase in the first quarter of 2012, a further £50bn increase in QE to £325bn would be welcomed by hard-pressed businesses," said David Kern, chief economist at the British Chambers of Commerce.

"QE will only achieve its full potential to support growth if it is supplemented by effective measures aimed at improving the flow of credit to viable businesses."

The Bank had a tough time during 2011 justifying its continued loose monetary policy in the face of rising inflation.

However, consumer prices inflation peaked in September at 5.2% - more than double the Bank's 2% target - and has since fallen to 4.8% in November.

The figure is expected to fall sharply in January data, when the effect of last year's rise in VAT drops out of the calculations, adding further support to a possible February decision to extend QE.

Related Internet links

The BBC is not responsible for the content of external Internet sites