Bank leaves interest rate at 0.5%

On the fourth anniversary of interest rates being held at a record low of 0.5%, the Bank’s Monetary Policy Committee (MPC) resisted pressure to restart its quantitative easing programme, which currently stands at £375 billion.

It is likely to have been swayed by signs of life in the services and retail sectors as the UK battles to avoid a triple-dip recession.

The pound earlier dipped below 1.50 against the US dollar on fears that the Bank would restart the printing presses.

Speculation of more QE was fuelled by the support of Governor Sir Mervyn King, who joined two colleagues in favour of more QE at the MPC’s meeting last month.

Pressure for more action comes amid signs that the Bank’s flagship Funding for Lending scheme is so far struggling to encourage banks to lend more to households and businesses.

Most economists expect more QE this spring and think that interest rates will remain at a record low for another two years, dealing a blow to savers.

Stephen Gifford, director of economics at the CBI, said mixed economic data would have made this month’s decision “a close call”.

He added: “With only a modest pick-up in growth expected, the possibility of further QE will remain a live issue.”

Industry survey data this week showed the fastest rise in service sector activity in five months, while separate figures revealed that high street sales grew at their fastest rate in more than three years last month.

Halifax added that house prices rose by 0.5% in February and by 1.9% in the biggest year-on-year growth in more than two years.

The British Chambers of Commerce (BCC) believes the UK will avoid a triple-dip recession, although it cut growth forecasts to 0.6% and 1.7% for this year and next.

It now expects the economy to recover from its 0.3% contraction in the fourth quarter to grow in the current quarter - albeit by a paltry 0.1%.

BCC chief economist David Kern said: “We expect quarterly growth to increase very gradually over the next two years, but it will remain modest and below-trend for some time.

“In addition, we now expect GDP to return to its pre-recession levels early in 2015 and the squeeze on living standards will continue for a while longer.”

Bank of England deputy governor Paul Tucker recently told MPs that he had even put negative interest rates up for consideration as part of efforts to kick-start the recovery.

Mr Tucker admitted it was an idea that needed to be thought through carefully, although the Bank is expected to look for other measures to support the faltering economy, which has weaved in and out of recession since the 2008 banking crisis.

Sir Mervyn favoured boosting the Bank’s quantitative easing (QE) programme by another £25 billion to £400 billion last month to aid growth.

A recent shock fall in manufacturing activity in February on top of gloomy construction figures has shown that the recovery is patchy across the economy and experts still believe there will be more QE later down the line.

The BCC is predicting another £50 billion in QE in the second quarter, but warned that it would provide “marginal benefits for the economy while heightening longer-term risks of financial distortions, bubbles and higher inflation”.

Howard Archer, chief UK and European economist at IHS Global, said more QE could also weaken the pound further.

“There is a danger that doing further QE at a time when sterling is already under serious downward pressure could cause the pound to fall too far too fast, which would be both destabilising and perhaps over-stoke inflation risks,” he said.

The pound rallied back up to 1.51 US dollars after the no-change decision.

But speculation was mounting over when - and what - action would be taken next by the Bank.

Stephen Boyle, head of group economics at Royal Bank of Scotland, said: “With a split vote last month and terrible survey results for manufacturing and construction activity in February, questions will be asked about how bad the outlook has to get before the Bank of England switches into action.”

Recent confirmation from the MPC that it is open to new ideas to aid recovery has fuelled expectations for a range of measures over the coming months.

Martin Beck, UK economist at consultancy Capital Economics, said Chancellor George Osborne could announce “radical reforms” of the monetary policy framework in this month’s Budget, while the Bank might increase the scale of its funding for lending scheme, or impose an effective rates cut by reducing the interest on commercial bank reserves.

“Given the range of potential instruments at its disposal, the MPC can be confident that monetary policy is by no means out of ammunition,” he said.

The Financial Times reported that Mr Osborne will use his Budget to hand new powers to Bank governor-in-waiting Mark Carney to rescue the economy.

It is thought he might change the Bank’s inflation remit to coincide with Mr Carney’s arrival in July.

The Bank has recently made clear it is prepared to look through above-target inflation - currently at 2.7% - in a more flexible approach to help boost growth.