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April 9, 2009

Bank of England keeps rates at 0.5%

by Richard Kilner

Story link: Bank of England keeps rates at 0.5%

The Bank of England’s Monetary Policy Committee (MPC) has chosen to retain interest rates at 0.5%.

The decision to pause the run of interest rate cuts which have seen rates plunge from 5% in October to 0.5% today was widely expected.

The Bank of England is continuing its £75bn asset purchase programme of quantitative easing, or printing money.

At present the programme has reached the £26bn mark and is forecast to last another few months.

There are a number of reasons why the interest rate decision was made, and why it was so widely anticipated.

Interest rate decisions take considerable time to feed into the economy, and rates themselves can barely be lowered much further.

In addition, the Bank of England was concerned about the prospects of deflation, a danger that is now seen as substantially less likely given the CPI, the official inflation measure, actually rose to 3.2% recently.

The pound’s weakness and continuing food inflation make it unlikely that CPI, which does not include housing costs, will dip into negative territory in the immediate future.

 

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