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Bank of England holds rates at historic low

The Momentum UK Team 07 November 2013

The Bank of England has kept its base rate at 0.5% and made no changes to its quantitative easing programme.

The news will come as little surprise to most, as the Bank has previously said that it won’t consider a rise in rates until unemployment falls below 7%.

Financial experts are now concentrating on the Bank’s latest inflation report which will arrive next week. Analysts will examine the report for indications of how well the Bank thinks the economy is recovering.

The Bank of England’s Monetary Policy Committee (MPC) has kept rates at the historic low of 0.5% since March 2009.

Under the policy of forward guidance brought in by new governor Mark Carney, the Bank has said that it doesn’t expect unemployment to fall below 7% - and consequently for interest rates to rise - until 2016.

However, many analysts think that the Bank will have to act sooner, based on the increasing strength of the UK economy. The economy grew by 0.8% in the third quarter of this year, and latest figures show that unemployment had fallen to 7.7% in the June to August period.

David Kern, chief economist at the British Chamber of Commerce, said:

“The decision to hold interest rates and QE was expected and correct,

“However, as the pace of economic growth strengthens, it is becoming clear that the first rise in official interest rates is likely to occur well before the Committee's 2016 prediction, due to the earlier than anticipated fall in unemployment.

“The MPC must use next week's Inflation Report to move towards a more realistic timetable for its forward guidance, to maintain business confidence and keep its credibility.”

Howard Archer, an economist at IHS Global Insight, said:

“The already limited likelihood of any further Quantitative Easing (QE) appears to have waned further as the good news on the UK economy has been largely sustained (notwithstanding a few blips such as the surprise marked drop in industrial production in August). Meanwhile, any change in interest rates is clearly a long way off whether or not unemployment ends up falling more rapidly than the Bank of England currently expects.

“Of course if the US defaults on its debt, we could be in a whole different ball game given the likely global economic and financial market turmoil this would cause.”

Momentum