As expected, the Monetary Policy Committee of the central bank decided to hold the official Bank Rate paid on commercial bank reserves at 0.5%. The rate now stands at the lowest level since the central bank was established in 1694. The previous change in the rate was a reduction of 0.5 percentage points in March 2009.
The MPC expects the asset purchase programme to take another two months to complete. The scale of the programme will be kept under review, the bank said in a statement.
Initially, the central bank introduced a GBP 75 billion programme of asset purchases financed by the issuance of central bank reserves on March 5. Later, the size of the quantitative easing was raised to GBP 125 billion on May 7 and again to GBP 175 billion on August 6.
The minutes of the two-day rate setting meeting will be published on September 23.
In the previous rate setting meeting held on August 5 and 6, six members of the MPC voted to raise the size of asset purchases by GBP 50 billion to GBP 175 billion, while the other three members including Governor Mervyn King sought a GBP 75 billion increase to GBP 200 billion, minutes had revealed.
While economists and policymakers across the world are increasingly spotting signs of recovery for the global economy, the UK is expected to be left behind in severe recession.
In a recent interview to BBC, former Federal Reserve chief Alan Greenspan said UK would be harder hit than the U.S. by the current recession and collapse in world trade.
The Paris-based Organization for Economic Co-operation and Development in its latest Interim Economic Assessment revised the 2009 GDP contraction estimate to 4.7% from 4.3%. The agency predicted a gloomier situation in the UK, while saying that the global recovery from the recession is likely to arrive earlier than expected.
The Office for National Statistics had upwardly revised the British economic contraction for the second quarter to 0.7% from 0.8%. The think-tank National Institute of Economic and Social Research said the economy grew 0.2% in the three months ended August, after a 0.3% decline in the three months ended July.
Elsewhere on Thursday, former BoE rate-setter David Blanchflower launched a scathing attack on the bank’s governor Mervyn King and criticized the monetary policy committee for not spotting the recession.
The economics professor, who foresaw recession well ahead of his colleagues on the MPC, wrote in an article published in Thursday’s New Statesman magazine that King “the old iron fist of the BoE”, dominated the MPC with his hawkish view on rates. He accused King of presiding over an institution which was ‘hobbled by group-think’.
Blanchflower expects the MPC to approve further quantitative easing by November at the very latest. He added that King may even manage to get rates down below 0.5%.
In reactions to the latest rate decision, British Chambers of Commerce’s Chief Economist David Kern said as a temporary measure, the MPC should consider the interest rate paid on deposits kept by commercial banks at the BoE and in some circumstances make this rate negative. The business lobby urged the MPC to raise the quantitative easing measures to GBP 200 billion and to buy more company debt.
Across the world, policymakers and finance ministers including Chancellor Alistair Darling have sought to continue with stimulus measures until the global economy recovers with sustainable growth.
Annual inflation in July stood at 1.8%, the same as in June, which was the lowest since September 2007. Thus, the rate stayed below the central bank’s 2% target for the second straight month.
The BoE said in its latest quarterly Inflation Report that the CPI inflation is more likely to fall below 1% in autumn, requiring an open letter from the Governor to the Chancellor. After releasing the quarterly report, King said in a press conference the economic recovery could be slow and protracted.
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