Nerve held on interest rates

Rates were held at 0.5 per cent for a 32nd consecutive month and the Bank’s Monetary Policy Committee (MPC) maintained its quantitative easing (QE) programme at £275bn.

The committee elected to wait and see whether the extra £75bn it pumped into the economy in a shock move last month takes effect, but economists predict further cash injections will be needed to spur growth.

Bank governor Mervyn King has warned that the UK could be facing “the most serious financial crisis” it has ever seen.

The country’s gross domestic product grew at a better-than-expected 0.5 per cent between the start of July and the end of September, although analysts believe the figure overstated the underlying health of the economy.

The chief UK and European economist at IHS Global Insight, Howard Archer, said he expected the Bank to pump a further £50bn into the economy in the first quarter of 2012.

He said: “We expect the economy to be stagnant over the fourth quarter of 2011 and the first quarter of 2012 before gradual growth, but it’s possible that contraction will occur, especially if there’s no easing in the eurozone’s sovereign debt problems.”

More details on the country’s growth prospects are expected next week when the Bank publishes its quarterly inflation report.

Capital Economics’ chief UK economist, Vicky Redwood, said she expected the committee to revise down “sharply” both its growth and inflation forecasts.

She said members would probably also “lay the foundations” for further QE, which is effectively printing more money in an attempt to increase lending. But she added: “With the effectiveness of QE questionable, the MPC is likely to have to think of other ways of supporting the economy.”

David Kern, chief economist at the British Chambers of Commerce (BCC), said higher QE on its own was not enough.

He said: “Without effective measures to improve the flow of credit to businesses, particularly smaller firms, the increase in QE will not achieve its full potential in supporting growth.”

Keeping low interest rates is good news for borrowers, and figures for the latest quarter show the number of home repossessions is rising more slowly than expected.

But it is bad news for savers and pensioners, who will continue to gain meagre returns on their money at a time when high inflation is devaluing their deposits.

The Bank has cited the continuing turmoil in the eurozone as one of the key threats to the UK recovery, with Italy and Greece in particularly perilous positions.

But there were more promising signs yesterday from Italy, where market jitters calmed as traders looked forward to the prospect of Prime Minister Silvio Berlusconi’s resignation and the creation of a new government led by leading economist Mario Monti.

The country’s borrowing costs eased slightly after an auction of government bonds went better than expected.

Markets had suffered huge losses in recent days as the yield on 10-year bonds rose above seven per cent – matching the levels recorded in Ireland and Portugal when those countries needed bailouts from the European Union and the International Monetary Fund.

IHS analyst Raj Badiani said: “Italy can still stumble out of the current crisis. Italy is better placed than the bailed-out peripherals, helped by its sounder budgetary position alongside markedly healthier private-sector fundamentals with regards to debt and wealth levels.”

Italy is under intense pressure to prove it has an adequate debt strategy, which stand at 1.9tn euro (£1.62tn), or 120 per cent of economic output.

Mr Monti, 68, is favourite to lead the country after President Giorgio Napolitano decided to name him a senator for life.

Mr Napolitano promised to speed up the passing of austerity measures and has said Mr Berlusconi will step down afterwards, probably by Saturday.

Mr Berlusconi even congratulated Mr Monti on his new post in a telegram, wishing him “fruitful work in the country’s interest” and recognising his achievements.

German Chancellor Angela Merkel said it was “very important that Italy wins back its credibility”.

She added: “That means the austerity package being implemented quickly, as is now the plan, and the political leadership being clarified as quickly as possible.”

Some positive news was reported in the US, where figures showed the number of people who applied for unemployment benefits last week fell to the lowest level since April.

The US trade deficit fell in September to the lowest point this year as sales of cars, aeroplanes and heavy machinery pushed exports to an all-time high.

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