Policy makers at the Bank of England (BoE) voted unanimously in September to hold the key interest rate unchanged at its record low of 0.5%, and that they would complete their 175 billion pounds APF program.
In August, the vote came 6-3 for expanding the program with 50 billion pounds, since some members, including Mervyn King, asked for a 75 billion pounds increase to reach a total of 200 billion pounds. However, this month King and Miles preferred to keep the bonds purchase at 175 billion pounds, claiming that it is better for the current period.
Meanwhile, there talks from central banks around the world to end their stimulus plans after the progress witnessed. The British economy moderated the pace of contraction in the second quarter to 0.7% compared with 2.4% in the first quarter. In addition, PMI services and manufacturing showed expansion, exceeding the 50 barrier, while the fall in house prices is lessening and mortgage approvals jumped to the highest in a year in July. Thus, since the economy is on the right track there is no need for further expansion in order not to suffer from high inflation rates after the recovery.
The Confederation of the British Industry (CBI) predicts growth to increase 0.3% and 0.4% in the third and fourth quarters respectively. CBI also expects the economy to grow 0.9% next year and they added that the BoE will raise the rate to 1% in the first half of the coming year.
The BoE cut the borrowing cost by 4.5% since October to rekindle growth in the economy that suffered tremendously from the global downturn. Besides, it adopted unprecedented methods of quantitative easing to accelerate the recovery pace through supporting markets with the adequate liquidity to spur lending and thereby spending. Gordon Brown gave permission to the BoE to spend up to 150 billion pounds on buying bonds. Nevertheless, the BoE chose to use only 75 billion pounds, before raising them to 125 billion pounds then to 175 billion pounds.
During August's minutes, there has been an argument with regard expanding the program. The majority voted for increasing the program with 50 billion pounds. They mentioned that raising the program over the 50 billion pounds should be joined with a similar decrease in borrowing cost to keep the inflation rate within the target. There is no need to expand the program further as the economy is already showing improvement since launching the program.
The minority, on the other hand, argued that there should be expansion to the program as the risks coupled with the increase is lower than spending less. King mentioned that a strong monetary policy would boost confidence and accelerate recovery. CPI for September dropped to 1.6%, indicating that there are still deflation risks and that the rate might remain below the 2% target for longer period. King projects that the inflation rate will remain 1% this year and before returning to the target by the end of 2012.
Moreover, the Jobless rate climbed to 7.9%, the highest since 1996, where the number of job seekers reached 2.47 million, the most since May 1995, which shows that the recession is still weighing on the economy and there is a need of a stronger intervention to shore it up. On the other hand, the financial sector is still fragile; credit conditions are tightened due to restrictions on lending. Last week, there were discussions by the BoE over reducing the rate at which banks put reserves in the BoE to encourage lending that slipped sharply as a result of the credit crisis.
Some economists predict the BoE not to extend the 175 billion pounds and stop it as it is completed. Hence, we have to wait and see how the economy will react in the coming period and how it would react if the program stopped.
In August, the vote came 6-3 for expanding the program with 50 billion pounds, since some members, including Mervyn King, asked for a 75 billion pounds increase to reach a total of 200 billion pounds. However, this month King and Miles preferred to keep the bonds purchase at 175 billion pounds, claiming that it is better for the current period.
Meanwhile, there talks from central banks around the world to end their stimulus plans after the progress witnessed. The British economy moderated the pace of contraction in the second quarter to 0.7% compared with 2.4% in the first quarter. In addition, PMI services and manufacturing showed expansion, exceeding the 50 barrier, while the fall in house prices is lessening and mortgage approvals jumped to the highest in a year in July. Thus, since the economy is on the right track there is no need for further expansion in order not to suffer from high inflation rates after the recovery.
The Confederation of the British Industry (CBI) predicts growth to increase 0.3% and 0.4% in the third and fourth quarters respectively. CBI also expects the economy to grow 0.9% next year and they added that the BoE will raise the rate to 1% in the first half of the coming year.
The BoE cut the borrowing cost by 4.5% since October to rekindle growth in the economy that suffered tremendously from the global downturn. Besides, it adopted unprecedented methods of quantitative easing to accelerate the recovery pace through supporting markets with the adequate liquidity to spur lending and thereby spending. Gordon Brown gave permission to the BoE to spend up to 150 billion pounds on buying bonds. Nevertheless, the BoE chose to use only 75 billion pounds, before raising them to 125 billion pounds then to 175 billion pounds.
During August's minutes, there has been an argument with regard expanding the program. The majority voted for increasing the program with 50 billion pounds. They mentioned that raising the program over the 50 billion pounds should be joined with a similar decrease in borrowing cost to keep the inflation rate within the target. There is no need to expand the program further as the economy is already showing improvement since launching the program.
The minority, on the other hand, argued that there should be expansion to the program as the risks coupled with the increase is lower than spending less. King mentioned that a strong monetary policy would boost confidence and accelerate recovery. CPI for September dropped to 1.6%, indicating that there are still deflation risks and that the rate might remain below the 2% target for longer period. King projects that the inflation rate will remain 1% this year and before returning to the target by the end of 2012.
Moreover, the Jobless rate climbed to 7.9%, the highest since 1996, where the number of job seekers reached 2.47 million, the most since May 1995, which shows that the recession is still weighing on the economy and there is a need of a stronger intervention to shore it up. On the other hand, the financial sector is still fragile; credit conditions are tightened due to restrictions on lending. Last week, there were discussions by the BoE over reducing the rate at which banks put reserves in the BoE to encourage lending that slipped sharply as a result of the credit crisis.
Some economists predict the BoE not to extend the 175 billion pounds and stop it as it is completed. Hence, we have to wait and see how the economy will react in the coming period and how it would react if the program stopped.
