Bank Of England To Keep Interest Rates On Hold

Bank Of England

First Posted: 4/03/2012 15:19 Updated: 4/03/2012 16:05   PA

The Bank of England will keep interest rates at their record lows of 0.5% this week, marking three years of pain for savers.

This week is the third anniversary of interest rates being slashed to unprecedented lows and the start of the emergency quantitative easing (QE) programme, policies which have been criticised for allowing people's savings to be eroded by inflation.

With the UK still in danger of recession, economists say there is no chance the Bank will hike interest rates from rock-bottom on Thursday, although it is not expected to print more money until its last £50 billion injection works its way into the system.

They predict more bad news for savers, as it may be years until interest rates are hiked, while there is division about whether more QE will be needed in future months.

The Bank's stimulus measures have been a blessing for homeowners with variable rate mortgages but for savers they have been a disaster because interest rates have failed to keep up with inflation.

The QE programme has delivered an additional blow to pensioners by dragging down annuity rates, which set the size of their pension for life.

Annuity rates are linked to Government bonds, which have seen their interest rates fall as the Bank uses its freshly printed money to buy them, driving up demand.

The National Association of Pension Funds (NAPF) recently hit out at the Bank's decision at its February meeting to increase its QE programme to £325 billion.

It said retirees would find that annuity rates, have been "squashed" by QE, leaving those approaching retirement in pain for the rest of their lives.

It would also cause a "headache" for companies running final salary pensions by increasing deficits by billions of pounds and could lead to more schemes being shut.

The squeeze for savers and pensioners has been made worse because the cost of living has been above the Bank's 2% target in recent months.

The Bank's governor Sir Mervyn King has repeatedly expressed his sympathy for savers but has said the stimulus measures were needed to help the economy.

Philip Shaw, an economist at Investec, said this month's decision is set to be a "clear-cut on-hold" for both interest rates and QE.

He added: "It would take a seismic change in the economic and inflationary landscape to bring proposals for higher interest rates back to the table" although he thought more QE was likely in May.

Howard Archer, chief economist at IHS Global Insight, does not expect rates to rise until at least 2013 and they could well stay put until 2014.

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Filed by Sara C Nelson  |