By: Dr. Mike Campbell
The Monetary Policy Committee (MPC) of the Bank of England has voted to keep interest rates at their historic low level of 0.5%. This is the 21st month where the rates have been kept on hold, so the move came as no surprise to analysts.
The MPC also held off on any further quantitative easing measures for the time being. Qunatitative Easing (QE) is the process whereby the bank injects new money into the economy for the purchase of government bonds as a mechanism to increase liquidity and stimulate the economy.
The UK recovery has been stronger than many predicted and it had earlier been believed that a further round of QE would be needed to offset the effects of the slowdown and UK government austerity measures designed to get the UK debt back under control. Minutes of MPC meetings reveal that there is a divergence of opinions with one member of the nine-strong committee voting for a rate increase and another voting for an immediate resumption of QE.
The MPC also held off on any further quantitative easing measures for the time being. Qunatitative Easing (QE) is the process whereby the bank injects new money into the economy for the purchase of government bonds as a mechanism to increase liquidity and stimulate the economy.
The UK recovery has been stronger than many predicted and it had earlier been believed that a further round of QE would be needed to offset the effects of the slowdown and UK government austerity measures designed to get the UK debt back under control. Minutes of MPC meetings reveal that there is a divergence of opinions with one member of the nine-strong committee voting for a rate increase and another voting for an immediate resumption of QE.
Part of the austerity measures approved by the government will see VAT (purchase tax) rise from 17.5 to 20% adding to inflationary pressure. The most recent consumer price index data shows that inflation (October) is running at 3.2% well above the target figure of 2%. However the bank is not unduly concerned about this and thinks that inflation will trend lower next year as the cuts take effect.
The UK balance of trade widened last month from £8.39 billion in September to £8.53 billion on the back of increased imports. However, this may be because firms are rebuilding stock levels and it will be a short-lived phenomenon. UK export activity has been performing well in recent months.