BoE’s Monetary Policy Committee voted today to keep the official bank rates paid to commercial bank reserves unchanged at 0.5%. The move to keep the bank rates constant was widely expected from the markets. In regards to the asset purchase program, the bank will for the moment continue on with the program that is due to expire in Novemeber. No comments were made in regards to the expectations to further stretch the BoE’s asset purchase program but will be under scrutiny.
The current interest rates are at an all time low since March 2009, when the BoE had cut the interest rates to 0.5%. Around the same time the Central bank and also initiated an asset purchase program which is currently at £375 billion.
As reported earlier today in our Pre Market Analysis of the Interest rates, it is a bit too early for the BoE to undertake additional measures to ease UK’s economy. With the Funding for Lending scheme that started yesterday, it is evident that the BoE’s MPC would prefer to wait and watch.
In addition to the asset purchase program, the FLS, brings an additional £2.5 billion which is aimed to incentivize banks that pass on the loans to small/medium sized businesses and individuals. This has been the biggest loan guarantee scheme to date. Analysts have already pointed out that with a large number of UK banks participating under the FLS, there is a possibility that the UK’s economy could get the much needed boost to encourage spending. However, banks that fail to fall short of the criteria could also be penalized, thus making this an effective loan scheme to inject into the economy.
The latest stand by the BoE clearly hints at the fact that a lot is riding on the extra funding schemes that has been launched and thus find it appropriate, atleast for the moment to wait until November when the current asset purchase program draws to a close. Since their last meeting, UK has been faced with a lot of grim economic news. The country’s second quarter GDP showed a contraction of 0.7% and then came the news of the slowdown in UK’s manufacturing sector which dropped to an all time low in 38 months.
The BoE’s decision, falls somewhat in line with S&P which kept the UK’s investment grade rating unchanged at Triple A. During the announcement Standard and Poors mentioned that the UK’s economy could pick up towards the end of the year. By not announcing any additional stimulus to what is already in place, the BoE governing body seems hopeful of a rebound during the course of the next few months.
With the Olympic Games underway, speculation is rife that the games would help to push up the UK’s failing economy. What’s worth mentioning is that the nation has been resilient, given the global economic slowdown and the UK’s close proximity to the Eurozone which is struggling to get out of the sovereign debt crisis.
Focus will now shift to the ECB press release scheduled in a few hours time. A lot is riding on ECB President Draghi whose recent comments on doing whatever it takes to sustain the Euro. Analysts will be closely watching the key decisions that will be taken during the ECB interest rate decision. Amidst the expectations, Germany’s Bundesbank, one of the most important and authoritative bank in the bloc has warned the ECB not to overstep.
