Bank freezes rates at 0.5%...and prints £50bn cash

THE Bank of England held interest rates at a record low of 0.5 per cent today and revealed shock plans to print £50billion of new money in a last-ditch attempt to revive the beleaguered economy.

The Bank plans to print 50bn extra cash The Bank plans to print £50bn extra cash

The Monetary Policy Committee (MPC) announced it will freeze rates at historic lows for the second month in a row, but pledged to continue injecting billions of cash into the banking system - a process known as quantitative easing (QE).

And in a drastic measure, Chancellor Alistair Darling confirmed an extra £50 billion of extra money will be pumped into the stricken economy in a desperate attempt to drag the country out of recession.

Today's unexpected decision means more than £125 billion of extra money will be printed by the Bank - before the economy has even felt the effects of the first stage of its quantitative easing programme.

In a statement released today, the Bank said: “The world economy remains in deep recession.

“Output has continued to contract and international trade has fallen precipitously.

The news means the bank is printing a total of 125bn The news means the bank is printing a total of £125bn

“The global banking and financial system remains fragile despite further significant intervention by the authorities.”

MORE RELATED STORIES...

EXPRESS CITY: ALL THE LATEST MARKET NEWS

EXPRESS MONEY: TIPS ON SAFEGUARDING YOUR CASH

EXPRESS SHARES: FIND OUT HOW YOUR INVESTMENTS ARE DOING

The global banking and financial system remains fragile despite further significant intervention by the authorities

Statement from the Bank of England

The timing of the news - with just one month still to go for the original £75 billion scheme - came as a surprise to many analysts, who had forecast no update on the strategy until at least next month.

The MPC has predicted it will take another three months to complete the enlarged £125 billion programme.

It added it would “keep the scale of the programme under review”.

Both rates and QE are designed to keep inflation under control and the MPC will have made today’s decision in the light of the Bank’s inflation report, which is due next week and should shine more light on policymakers’ predictions for the economy.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club, said much of the initial QE pot was spent on gilts - government guaranteed debt.

She said: “The lack of relevant data makes it difficult to monitor the success of QE but with gilt yields creeping up, this has forced the Bank into using up more of the £150 billion available.

“With deflation unlikely to be a major concern thanks to the weak sterling keeping the cost of imports up, ITEM expects interest rates to be kept at 0.5 per cent over the course of this year.”

Today’s decision comes in the wake of a sustained period of cuts from the MPC, which has slashed rates to the lowest level in the Bank’s history.

But it is likely to keep rates on hold as it weighs the effect of QE on the UK’s recession-hit economy.

Analysts believe further rate cuts are unlikely due to the potential impact on banks’ margins and their willingness to lend, so the focus is set to stay on QE.

James Hughes, Chief Investment Officer at Black Swan Capital wealth managers said: "At this very low level, the marginal impact of a further rate cut would be negligible, and would only have sent a very pessimistic message into the market.

"The fact of the matter is that real interest rates are already negative anyway, as inflation, driven by money supply growth and importation through weakened Sterling, already exceeds nominal interest rates.

"Borrowing money is, effectively, free, which makes monetary policy impotent at this point. Fiscal policy is the answer and so Keynes was right. Consequently, we do not expect interest rates to move for the next year or so, possibly longer."

The Bank’s latest trends in a lending survey revealed a mixed picture when it was released at the end of last month.

Major lenders reported only a limited improvement in mortgage supply since the beginning of the year, but some indicated a willingness to make more credit available to businesses and individuals.

The MPC has had much to chew over in its two-day meeting, including the shock figures showing the UK economy plunged further into recession with a 1.9 per cent dive in output during the first three months of 2009.

A significant factor which will have been weighed up was data showing the UK experienced its first period of deflation in almost 50 years in March, as the Retail Prices Index (RPI) measure of inflation fell to minus 0.4 per cent.

Meanwhile, the official Consumer Prices Index (CPI) measure also fell to 2.9 per cent but was still well above the Government’s 2 per cent target.

Today the Bank said CPI inflation is likely to drop below the 2 per cent target later this year, driven in part by lower food and energy prices.

But recent surveys from manufacturing, services and construction sectors have appeared to suggest that the speed of the UK’s slump has slackened.

Ian McCafferty, chief economic adviser to the CBI business group, said: “Quantitative easing is still in its very early stages, and we saw a positive response immediately after the Bank began investing in gilts.

“For it to be fully effective, it should support money supply growth and broader lending, as well as boost liquidity.

“It will be some time before we have hard evidence of whether it is having the desired effects, but more businesses are telling us they see some of the credit freeze starting to thaw, and fewer of them report that conditions are getting worse.”

Would you like to receive news notifications from Daily Express?