Bank of England holds interest rates at 0.5pc, maintains QE
Posted on October 7th, 2010
The Bank’s nine-strong Monetary Policy Committee (MPC) kept the base rate at 0.5pc for a 19th month and did not vote to expand the £200bn programme to buy assets with newly created money – so-called quantitative easing (QE).
However, the outcome of the vote could mask a three-way split among policymakers as to whether to opt for further easing or tightening, amid conflicting information about the economy.
Economists believe that when the minutes of the two-day meeting are released later this month, they could reveal MPC external member Adam Posen voted to expand QE, after voicing concerns that the UK faces a “lost decade” to rival Japan in the 1990s unless more action is taken.
If so, it would represent the first time since November 2009 that at least one member voted for more QE.
However, Mr Posen’s fellow MPC member Andrew Sentance was expected to repeat his call for the base rate to be raised, fearful about inflation.
This week’s surprise move by the Bank of Japan to cut interest rates and prepare the way for QE have raised bets that the UK will follow suit, possibly before the year end.
Ian McCafferty, economist at the Confederation of British Industry (CB), said: “There is a lively debate between MPC members. Some fear that the weakness of the domestic economy will drive inflation well below target, thus requiring further monetary stimulus.
“Others think the medium-term inflation outlook is less benign owing to imported raw material costs and loosening inflation expectations. With the economy likely to be sluggish over the winter, this debate is unlikely to be resolved in the near term.”
Howard Archer, an economist at IHS Global Insight, put the odds of the Bank eventually enacting more QE at “40pc and rising”.
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