The Bank of England has kept interest rates on hold despite growing pressure for more emergency support to aid the UK’s faltering economy.
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The no-change decision comes a month after policymakers extended quantitative easing (QE) to £375 billion and held discussions about the merits of cutting interest rates from their current record low of 0.5%.
The Bank’s Monetary Policy Committee (MPC) is hoping that existing measures such as the extra £50 billion of QE and this week’s launch of a “Funding for Lending” scheme will be enough to lift the UK out of its double-dip recession.
But a sharper-than-expected 0.7% decline in output between April and June and figures on Wednesday showing the worst manufacturing performance in three years suggest storm clouds from the eurozone crisis are hitting the UK.
And while the Bank of England has opted to make no change to policy, pressure has increased on European Central Bank (ECB) president Mario Draghi to deliver on his promise to do whatever it takes to save the euro.
The pledge, made in London last week, prompted speculation that the central bank will return to financial markets and resume the buying of bonds of under-pressure countries. A further cut to the key interest rate is also a possibility.
The MPC, chaired by Bank governor Sir Mervyn King, has considered cutting rates below current levels in a drastic move that once seemed improbable. Economists believe that the move was also discussed but the MPC continues to favour quantitative easing as its economic weapon of choice.
Alan Clarke, UK and eurozone economist at Scotiabank, said: “The poor second quarter GDP data make it hard for the Bank of England not to loosen monetary policy further.”
The economy’s second-quarter decline means the UK is now mired in the longest double-dip recession since quarterly records began in 1955 – and possibly since the Second World War.
The Bank’s main concern over a rate cut beyond 0.5% is the impact it could have on some banks’ and building societies’ ability to lend. Lenders have assets, mainly mortgages, with interest payments contractually linked to the Bank’s rate and a reduction below 0.5% might squeeze some lenders’ interest margins to the point at which they become less able to offer new loans to customers.
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