Bank of England refrains from further QE stimulus

The BBC's Declan Curry looks at why interest rates matter

The Bank of England has decided not to extend its quantitative easing (QE) stimulus programme, which has injected £375bn into the UK financial system.

Under QE, the Bank creates money and uses it to buy government bonds to try to stimulate the economy.

The Bank's Monetary Policy Committee (MPC) also decided to keep interest rates at 0.5%, the record low they have been held at since March 2009.

The UK came out of recession recently, growing 1% between July and September.

The strong rebound, which was helped by tourist spending during the Summer Olympics, followed nine months of modest economic contraction.

However, recent data suggests the economy remains finely balanced between growth and recession. Retail sales were revealed last month to have fallen a faster-than-expected 0.8% in October.

Start Quote

The economy is still quite weak ”

End Quote Ross Walker Chief UK economist, RBS

Moreover, on Wednesday, the independent forecasting body the Office for Budget Responsibility cut its forecast for growth in the UK economy for this year and every year up until 2016. It now expects the economy to shrink by 0.1% this year.

Some economists have questioned the effectiveness of the Bank's QE policy, suggesting that it does little more than replace one low-risk asset on banks' balance sheets - government debt - with another even lower-risk asset - a deposit at the Bank of England - and has failed to induce the banks to lend more.

In response, the Bank has instituted the Funding for Lending scheme, which aims to subsidise lending by banks to businesses and households, and which came into operation earlier this year.

Another reason for the Bank to pause on QE was provided by the most recent consumer prices data, which showed inflation jumping unexpectedly to 2.7% in October, compared with a 2.2% rate the month before.

The Bank's mandate requires it to target a 2% annual increase in the Consumer Prices index in the medium term.

"They have a bit of a balancing act at the moment," said Ross Walker, chief UK economist at RBS, "because inflation is a little bit above its target and is expected to stay there for several months.

"But at the same time the economy is still quite weak as we saw with yesterday's forecasts [from the OBR]."

The European Central Bank is due to announce its own interest rate decision later.

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