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Interest rates set to stay on hold

Bank of England governor Sir Mervyn King is not expected to follow his increasingly gloomy words on the health of the world economy with further emergency measures this week.

The Bank's Monetary Policy Committee (MPC) is forecast to hold interest rates at a record low of 0.5% while its quantitative easing (QE) programme will stay at £275 billion at its meeting on Thursday.

The no-change decision is widely expected by economists despite Sir Mervyn warning that the UK faces a "systemic crisis" and urging banks to brace themselves for a potential eurozone collapse amid fears of a second credit crunch.

A further cash injection to boost the economy is highly probable but not until next year, according to the minutes from the MPC's November meeting, as the last £75 billion boost in October will take a couple more months to complete.

Howard Archer, chief UK and European economist at IHS Global Insight, expects the MPC to enact a further £50 billion of QE in both the first and second quarters of 2012, taking the total up to £375 billion.

He said: "The December meeting of the Bank of England's Monetary Policy Committee is unlikely to result in any early Christmas presents for the needy UK economy. The message coming from the MPC seems to be that more quantitative easing is highly probable but not until the New Year."

The MPC pumped an extra £75 billion into the economy in October amid signs the recovery was heading to the rocks and the picture has continued to worsen.

Purchasing Managers Index (PMI) data for November on the manufacturing industry released earlier this week gave further evidence to suggest the UK economy will contract in the final three months of the year, while PMI data on the service sector released tomorrow is forecast to paint a similarly bleak picture.

While the gross domestic product (GDP) in the third quarter grew at a better than expected 0.5%, economists warned the figure overstated the underlying health of the economy.

Meanwhile, the crisis in the eurozone - which the Bank cited as one of the key threats to the UK recovery - continues to escalate as EU leaders are yet to deliver a concrete plan to resolve the region's problems.


From Belfast Telegraph