MercoPress. South Atlantic News Agency

Bank of England “wait and see policy” leaves QE unchanged at £ 175 billion

Growing concerns over the fragility of the UK recovery

The Bank of England voted Thursday to hold interest rates at its 0.5% record low and continue with its £175 billion program to boost the money supply at its latest two-day meeting. The decision was taken despite concerns over the fragility of the UK recovery from recession.

The Monetary Policy Committee (MPC) faced calls this week to increase the scale of its quantitative easing efforts to at least £200 billion after worse than expected manufacturing figures.

But the latest decision was in line with the views of most economists, who expect the MPC to look again at the impact of the policy next month with the help of the Bank's latest inflation forecasts.

The MPC is weighing up mixed signals on the UK economy, with rising house prices and stock markets set against a surprise 1.9% fall in manufacturing output during August after two months of growth.

Although the wider economy is expected to return to growth between July and September after five quarters of recession, the Bank's preferred measure of money supply showed sluggish growth during August - casting doubt on whether the QE policy was working.

Alongside its call for a QE increase, the British Chambers of Commerce has pressed the MPC to cut the rate at which financial institutions leave money on deposit at the Bank, to encourage lending in the wider economy.

The MPC is worried that the lingering problems in the financial sector will hamstring a recovery while banks repair their damaged balance sheets. The minutes of its September meeting said there could be “false dawns” for the economy.

The committee is charged with keeping inflation at 2% but its Consumer Prices Index benchmark - currently at 1.6% - has not fallen as quickly as expected, due to factors such as the slimmer chances of lower gas and electricity bills as well as the weakness of the pound.

The stickiness of inflation is likely to have kept the majority of the MPC from pushing for more stimulus measures for the economy, despite a push from governor Mervyn King and two others on the committee for a £75 billion boost to QE during August.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A £75 billion program of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The program was increased to a total of £125 billion on 7 May 2009 and to a total of £175 billion on 6 August 2009.

Purchases of £162 billion have been made under this facility since its use for monetary policy purposes was first announced after the Committee’s March meeting.