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MPC split remains on base rate and QE

MPC split remains on base rate and QE

Category: Economy

Updated: 22/12/2010
First Published: 22/12/2010

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 It is now over 6 months old so the content may be out of date.

There continues to be a three way split in the Bank of England's Monetary Policy Committee (MPC), although the majority continue to vote for a freeze in rates.

Earlier this month, the Bank announced that the base rate of interest had once again been frozen at 0.5% and there would be no change in the programme of quantitative easing (QE).

The base rate has been on hold at the historical low point since March 2009 in an attempt to ease the pressure on the UK economy.

The decision has been credited with keeping thousands of people out of arrears and helping to lessen the potential number of repossessions.

However, minutes from the MPC's meeting earlier this month tell a familiar tale.

Andrew Sentance voted to increase interest rates to 0.75% once more, while Adam Posen preferred to maintain rates but increase the size of QE by a further £50 billion to £250 billion.

All other seven members of the committee voted to maintain the size of the QE programme and maintain interest rates at 0.5%.

It seems likely that rates will remain low throughout 2011 although a small increase cannot be ruled out.

The continuing low base rate, combined with sky-high inflation – the measure is currently at 3.3%, well above the Government's 2% target – has hit savers hard.

Following the recent inflation figures, said that in order to maintain the purchasing power of their savings, a basic rate tax payer needs to find a savings account paying 4.13% pa, while a higher rate tax payer at 40% needs to find an account paying 5.5% pa.

While basic rate tax payers have a choice of 57 savings accounts, allowing for tax, that negate the impact of inflation, only 44 accounts are available to 40% band tax payers.

The majority of the savings accounts that negate inflation are ISAs.

Amongst the savings accounts currently paying above the rate required for a basic rate tax payer to break at least even are the AA's Internet Five Year Fixed Rate Bond which pays 4.50% and State Bank of India's Four and Five Year Hi Return Fixed Deposit Fixed Rate Bonds which pay 4.20% and 4.50% respectively.

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