UK interest rates remain at record low of 0.5%

The Bank of England has held UK interest rates at a record low of 0.5% for another month.

It has also decided not to extend its quantitative easing programme, designed to stimulate lending in the economy, beyond the £375bn already spent.

The Bank’s Monetary Policy Committee has held rates at 0.5% since March 2009 in a bid to help economic recovery.

Rates were expected to rise early next year, but economists think this will be pushed back due to recent poor news.

The Chancellor, George Osborne, has also warned that the UK will not escape the slowdown in the
Eurozone.

The Bank of England has said it wants to be sure growth is on a firmer footing, and that slack in the labour market is reducing, before it raises interest rates.

Source: www.bbc.co.uk/news/business

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Bank OF England Says Keep Interest Rates Low For Now

Interest rates should remain low to avoid long-term economic stagnation, the chief economist at the Bank of England has said.

Global markets have tumbled this week, with investors disconcerted at the lack of growth in Europe and especially Greece, the impact of Ebola, and worrying economic data from China and the US.

Previously, UK interest rates had been expected to rise early next year.

Andrew Haldane said in a speech he was downbeat over the UK economy because of weaker global growth, low wage growth and financial and political risks.

He said there was still plenty of reasons to be cheerful. Growth is set to be the fastest of any major economy this year and inflation and borrowing costs are low, he said.

Source: www.bbc.co.uk/business

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UK Interest Rates Remain at Record Low of 0.5%

The Bank of England has held UK interest rates at a record low of 0.5%.

It has also decided not to extend its quantitative easing programme, designed to stimulate lending in the economy, beyond the £375bn already spent. 

Rates have been at 0.5% since March 2009, with the market expecting a small rise early next year. 

There has been increasing speculation over when the bank will start to raise the rates again.

Markets are expecting a rise at some point next year. However some think it could be later this year due to the General Election which is scheduled for May 2015. 

The UK economy has been growing strongly this year – with GDP rising by 0.9% between April and June, following a 0.7% rise in the previous quarter – and is on course to outperform many other developed economies this year. 

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WILL THIS BANKING INITIATIVE WORK?

The latest Government initiative to get the banks to lend money has recently been announced by the Bank of England and the treasury under the “Funding for Lending Scheme”.

Under this scheme UK banks and building societies will be able to raise funds for about 1% less than they currently can in the market.

The thinking behind this is that this cheap money should be passed on the households and businesses in lower borrowing costs bringing a quicker end to the recession. The scheme will work by incentivising lenders to compete.

George Osborne said it would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the Eurozone debt storm”.

The banks have always said that the major stumbling block for lending money was that businesses presently do not have the appetite to borrow.

However, any credit easing has to be welcome.

Add to this the relaxation of the banking liquidity rules and the additional £50bn of QE and the measures could add up to a helpful package.

With the worsening Euro crisis lending has fallen and borrowing costs risen - uncertainty associated with the problems in the Euro area have simply exacerbated the problem.

According to a Bank of England report “some firms were unable to obtain credit at any costs” and resorted to raising money “wealthy individuals”. This is clearly a very difficult situation for small business’s to operate within.

The scheme will let UK banks and building societies swap difficult debts for treasury bills at a fee starting at 0.25%. This fee will increase if lending is reduced so therefore the more lending the bank does the bigger its interest margin and the easier it is to outprice competitors – easy!.

Tim Corfield says “any initiatives in this area have to be welcome. However, I suspect that until confidence is resorted many businesses will not have the appetite for investing. Bank credit decisions also would not have changed and given that the balance sheets of many small or medium size companies have deteriorated over the last few years the banks may not see sufficient security for their lending”.

Tim Corfield - July 2012