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Base rate held but QE receives further boost

Base rate held but QE receives further boost

Category: Economy

Updated: 06/11/2009
First Published: 05/11/2009

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The Bank of England base rate of interest has been frozen at 0.5 per cent for the eight month in succession, but the programme of quantitative easing (QE) has been extended by an additional £25 billion, the Monetary Policy Committee (MPC) has announced.

Now totalling £200 billion, it is the third time the Bank has enlarged the scale of its asset purchase programme, which was initiated at the same time the base rate was slashed in March. The scheme had originally amounted to £75 billion, but was increased to £125 billion in May, and to £175 billion in August.

The bank said it recognises that the world economy is beginning to show signs of recovery, with a number of emerging markets rebounding to growth.

However, it also cited a six per cent fall in output in the UK since the beginning of 2008, which has seen household spending dwindle and business investment fall sharply.

Results have been mixed in recent weeks; the manufacturing and service sectors have both recorded growth with PMI scores of over 50, while house prices continue on an upward trajectory, as does consumer confidence, figures suggest.

Despite these encouraging signs, the economy continued to contract in the third quarter, while output in the construction sector also declined.

"Rates kept low and more money pumped into the economy - no surprises there. But what would normally happen in a low interest rate environment is that the lending market would free up allowing people trade up, keeping the oils of the housing market turning," Ben Thompson, Director, Mortgages at Legal & General said:

"What we've actually got is an artificial, mini house price bump, which is not desirable. We're therefore experiencing a temporary supply-led recovery but what we really want is a long-term demand-led recovery."

The minutes of the MPC's meeting will be released on 18 November.

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