Policy makers at the Bank of England (BoE) opted to keep their benchmark interest rate at its current record low of 0.5%. The announced rate came analogous to both median estimates and September's rate. On the other hand, the MPC held the Asset Purchase Facility program at 175 billion pounds.
The MPC mentioned that the program is expected to be completed in November and the size of the program will be reviewed. In addition, Minutes related to this meeting will be available on 21 October at 9:30 am.
The bank thinks that keeping the monetary measures adopted is an optimal solution, especially after the economy had shown progress starting from the second quarter. Services expanded the most in 2 years the previous month; confidence spiked to 18-month high in September; and house prices are continuing their rise. The British economy, in response, showed improvement in the second quarter; as the pace of contraction eased to 0.7% compared with 2.4% in the first quarter, the worst since 1955.
However, despite the progress seen, the data released recently is still showing some volatility which means that recovery might be patchy. Manufacturing and construction in September retreated again after showing improvement. Thus, the BoE may raise the APF program to 200 billion pounds next month as still the economy needs help.
The BoE slashed the borrowing cost by 4.5% since October, in an attempt to rekindle growth and revive the economy. Besides, Gordon Brown gave the BoE permission to spend up to 150 billion pounds on buying gilts. The bank started the program in March by spending 75 billion pounds, before announcing another 50 billion pounds in May and additional 50 billion pounds in August to complete the 175 billion pounds.
During August's meeting, there has been a disagreement concerning expanding the APF program. Six out of nine voted for increasing the program with 50 billion pounds, whereas King and other 2 members preferred to raise the program to 200 billion pounds. In September, King agreed with the consensus to leave the APF program at 175 billion pounds.
The economy is still facing major threats that may derail recovery; which are the deflation risks, rising unemployment, tightened lending conditions. Fear of deflation, which may drag the economy to a far-reaching calamity, is perhaps the main reason behind increasing the bonds purchase program by 50 billion pounds in August.
CPI for September dropped to 1.6% from 1.8% a month earlier. The low rate is raising concerns of deflation risks. The BoE raised inflation forecasts to near 0.4% by the end of the current year; before climbing to 1.5% by the end of next year, while they anticipate the rate to return to target by 2011.
Moreover, the unemployment rate is now at 7.9%, the highest since 1996, signaling that companies are still terminating workers; therefore, spending and growth are jeopardized. The British Chamber of Commerce last month predicted that the number of persons unemployed will jump to 3 million people in 2010. Also, lending by banks is very weak; Barclays and RBS, the largest two banks in the U.K., announced that they stopped lending to gather liquidity.
The International Monetary Fund (IMF) growth estimates for the UK next year at 0.9 percent from the prior estimates of 0.2 percent. For this year, the IMF expects that the economy will contract by 4.4 percent worse than the prior projections of contraction more than 4.2 percent.
