Base Rate remains at 0.5%

11 September 2009

The Bank of England has held the bank base rate at 0.5% for the sixth month in a row.

It says it will also continue with its £175bn quantitative easing scheme but will not extend it this month.

Last month the Monetary Policy Committee injected £50bn into the economy to create up to £175bn on the UK's balance sheet. As of September 3 some £140bn worth of assets had been purchased under the QE scheme. The MPC expects the QE programme to take another two months to complete, with the scale of the programme continuing to be kept under review.

The governor of the Bank of England, Mervyn King, stated that QE would take six months before it was possible to assess whether it was working, and those six months are now up.

On the positive side, QE has depressed gilt yields by as much as 50 to 100 basis points and corporate bond yields by even more. QE has also boosted UK equities, although it is difficult to quantify how much money investors have switched into shares from gilt sales.

But on the negative side, there have been few signs of an increase in bank lending with money from gilt sales remains stuck in the banking system. ommercial bank reserves at the Bank of England have risen from £45bn (in March 2009) to £161bn (in July 2009), the latest available date.

The failure of the banks to lend can be attributed to the lack of solvency amongst the banks themselves, the fear of incurring more bad debts in weak economy, or the desire not to borrow on the part of indebted households and companies.  Until the confidence returns to the market we are likely to still find funding difficult and expensive to obtain.