Bank of England Leave Rates On Hold

The European Central Bank and the Bank of England have both left rates unchanged, at record low levels. In the case of the Bank of England, the key interest rate has sat at 0.5% since March 2009 which underlines just how entrenched the hangover from the Global Financial Crisis has been. The ECB rate is 0.25% where it has been since early November when it was reduced from 0.5% to provide further stimulus for the Eurozone recovery.

The idea of “cheap” money is that banks will take advantage of the offer and be able to pass on low cost financing to businesses which should allow them to expand, creating new jobs to fuel resurgent demand – the trouble is that this has proved to be a false dawn so far because the banks have been somewhat reluctant to lend as they try to recover from the consequences of the Global Financial Crisis and respond to structural reforms being imposed on them by the EU and individual member states which are designed to ensure that the crisis can’t be repeated. The other problem has been that with demand weak, businesses have been reluctant to invest in expansion, tending to explain why the recovery from the crisis has been much slower and shallower than a typical recessionary/recovery cycle.

There are increasing signs in the Eurozone and, perhaps more clearly, in the UK economy that the continent’s economic fortunes are finally on the mend. In the UK, the Chancellor of the Exchequer noted that the Office for Budget Responsibility had raised its growth forecasts for this year and the next from 0.6 to 1.4% and 1.8 to 2.4%, respectively. He also claimed that the nation will return to a budget surplus in 2018/19, a year earlier than predicted.

Neither central bank has imminent plans to raise interest rates in the near future as the UK and Eurozone battle to reduce unemployment levels and are currently free of significantly inflationary pressure.