Bank holds rates at historic low
Guardian.co.uk, 7 May 2009
The Bank of England's monetary policy committee left interest rates at a historic low of 0.5% today but said it would increase the size of its quantitative easing operations by 50bn to 125bn.
The pound had reached near four-month highs against both the dollar and euro in the run-up to the announcement on growing confidence that the worst might be over for the UK economy.
But it shed some of its gains after the announcement from the Bank, dropping nearly a cent against the dollar to $1.508 and by half a cent against the euro to 1.132.
Mark Deans, dealing manager at Moneycorp, said: 'The MPC has taken another pause for breath by freezing interest rates at 0.5% for the second month in a row. This will enable the Bank to assess the impact of the recent bout of interest cuts on the economy before taking further action on rates or quantitative easing. 'This decision ... is likely to add a further bounce to the already improving sterling, which is currently at its best levels against the dollar and the euro of the year. This will be good news for UK businesses, particularly for importers who should be less crippled by costs from overseas.
The MPC said there were 'promising signs' in forward-looking surveys that the pace of decline in the British economy might be slowing, but added that weak global demand and the continuing restructuring by British banks would act as a drag on any recovery for a long time to come.
Gilt futures, which had plunged this morning ahead of the announcement on fears that the MPC would not announce further QE gilt purchases, bounced on the news, regaining half their losses in a couple of minutes, as the market digested the extra BoE purchases, which will reduce supply in a market that it potentially suffering a huge supply glut because of the government's growing deficits.
The 10-year yield, which moves inversely to prices, fell back from the near three-month high of 3.73% as a result. It was trading at around 3.65% shortly after the news.
The BoE said in early March that conventional monetary policy had reached its limits and embarked on a 75bn programme to buy assets with newly created money to boost the supply of credit - the bulk of which are government bonds, or gilts.
So far it had bought more than 50bn of assets putting it on track to complete the original programme by early June.
Britain's economy shrank at its fastest pace since 1979 in the first three months of this year, and looks set to record its worst full-year performance since the second world war.
However, recent surveys suggest the pace of decline is slowing. Consumer confidence has picked up markedly over the past two months, equity prices have jumped by a fifth and money market strains appear to be easing.