UK

Interest Rates Held As Bank Of England Rejects Restarting Quantitative Easing

07/03/2013 12:21 GMT

The Bank of England has held off from more economy-boosting measures in what is likely to have been a knife-edge decision among policymakers.

On the fourth anniversary of interest rates being held at a record low of 0.5%, the Bank's Monetary Policy Committee (MPC) resisted pressure to restart its quantitative easing programme, which currently stands at £375 billion.

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The CBI said that quantitative easing 'remains a live issue in spite of the Bank of England's news

It is likely to have been swayed by signs of life in the services and retail sectors as the UK battles to avoid a triple-dip recession.

Sterling spiked on the news there would be no more quantitative easing after having earlier dipped below 1.50 against the US dollar over fears that the Bank would restart the printing presses.

Speculation of more QE was fuelled by the support of Governor Sir Mervyn King, who joined two colleagues in favour of more QE at the MPC's meeting last month.

Pressure for more action comes amid signs that the Bank's flagship Funding for Lending scheme is so far struggling to encourage banks to lend more to households and businesses.

Most economists expect more QE this spring and think that interest rates will remain at a record low for another two years, dealing a blow to savers.

Stephen Gifford, director of economics at the CBI, said mixed economic data would have made this month's decision "a close call".

He added: "With only a modest pick-up in growth expected, the possibility of further QE will remain a live issue."

Industry survey data this week showed the fastest rise in service sector activity in five months, while separate figures revealed that high street sales grew at their fastest rate in more than three years last month.

Halifax added that house prices rose by 0.5% in February and by 1.9% in the biggest year-on-year growth in more than two years.

The British Chambers of Commerce (BCC) believes the UK will avoid a triple-dip recession, although it cut growth forecasts to 0.6% and 1.7% for this year and next.

It now expects the economy to recover from its 0.3% contraction in the fourth quarter to grow in the current quarter - albeit by a paltry 0.1%.

BCC chief economist David Kern said: "We expect quarterly growth to increase very gradually over the next two years, but it will remain modest and below-trend for some time.

"In addition, we now expect GDP to return to its pre-recession levels early in 2015 and the squeeze on living standards will continue for a while longer."

Bank of England deputy governor Paul Tucker recently told MPs that he had even put negative interest rates up for consideration as part of efforts to kick-start the recovery.

Mr Tucker admitted it was an idea that needed to be thought through carefully, although the Bank is expected to look for other measures to support the faltering economy, which has weaved in and out of recession since the 2008 banking crisis.

Sir Mervyn favoured boosting the Bank's quantitative easing (QE) programme by another £25 billion to £400bn last month to aid growth.

A recent shock fall in manufacturing activity in February on top of gloomy construction figures has shown that the recovery is patchy across the economy and experts still believe there will be more QE later down the line.

The BCC is predicting another £50bn in QE in the second quarter, but warned that it would provide "marginal benefits for the economy while heightening longer-term risks of financial distortions, bubbles and higher inflation".

Howard Archer, chief UK and European economist at IHS Global, said more QE could also weaken the pound further.

"There is a danger that doing further QE at a time when sterling is already under serious downward pressure could cause the pound to fall too far too fast, which would be both destabilising and perhaps over-stoke inflation risks," he said.