Bank Of England Holds Interest Rates
The Bank of England has held interest rates at 0.5% on Thursday, after a week that saw its governance and independence questioned. The bank has also not announced any extension to its quantitative easing (QE) programme.
The bank announced a £75bn extension to its bond buying programme in October in a bid to free up capital in the financial system as worsening domestic data and the continued crisis in the eurozone weighed on the UK economy. The minutes of the Monetary Policy Committee (MPC) meeting showed that there was considerable appetite for QE in October, and many analysts believe that if the economy does not show signs of returning to meaningful growth in the current quarter that the bank will launch a further round in the New Year.
Gross domestic product (GDP) growth in the third quarter beat forecasts, hitting 0.5%, while inflation broke the 5% mark.
"The minutes of the October MPC meeting revealed a marked escalation of concern within the committee over the current state of the economy and the outlook amid serious domestic and international headwinds – and events since then are likely to have maintained or even increased these concerns," Howard Archer, chief European and UK economist at IHS Global Insight wrote on Wednesday.
The eurozone crisis appears to have rolled onto a new phase as the markets focus on Italy's faltering economy and debt mountain. A worsening of that situation will likely impact on the UK, and the third quarter's surprise bounce was more than likely due to technical factors.
"Most recent data and survey evidence portray an economy that is struggling hugely, and it looks to be in serious danger of stagnating or even worse in the fourth quarter," Archer said.
On Tuesday, the Commons Treasury Committee recommended that the governance of the Bank of England be reformed to give the chancellor more power to direct the institution during times of economic stress.
Academics and analysts have greeted the proposals with concern. As the Institute of Economic Affairs' Professor Philip Booth said:
“Whilst there are a number of proposals mentioned in the Treasury Select Committee report which may well be quite sensible, the proposal to give government-appointed members a majority on the MPC would be a mistake. Credibility is hard-won by central banks and this proposal would undermine the credibility that comes from the central bank's independence."