Interest rates set to remain held

Wednesday, June 3, 2009


The Bank of England's interest rate setters are expected to keep the cost of borrowing unchanged at 0.5% for the third month in a row.
The European Central Bank is also likely to keep its own rate unchanged at 1% following last month's cut.
What may be of more interest is what either bank says about its other policies for getting money circulating.
Last month, the Bank of England announced it would be injecting an extra £50bn into the economy.
But the members of its Monetary Policy Committee (MPC) may feel that it is not yet time to extend the programme of quantitative easing.
Purchasing managers' indexes in the past few days have suggested the recovery may be coming faster than expected.
The pound has hit a seven-month high against the US dollar, which may suggest that traders think that UK rates could begin to rise again sooner rather than later.
However, John Higgins, market economist at Capital Economics, said that the cost of borrowing was likely to remain at the current level until the end of 2010.
"Amid all the excitement about the green shoots of economic recovery, markets have not altered their expectations for the path of monetary policy much in recent months," he said.
Future problems?
The Bank of England is due to complete its £125bn spending on quantitative easing in July.
The Treasury has said it can spend up to £150bn, so if the MPC members want to extend the programme significantly, they might decide to ask for permission to do so this month instead of waiting until July.
Under the quantitative easing programme, the Bank of England prints money and uses it to buy government and corporate bonds to increase the amount of money in circulation and stimulate economic activity.
The European Central Bank announced last month that it would also be buying bonds - about £60bn of them - and more details of that programme are expected later.
On Tuesday, German Chancellor Angela Merkel made a speech supporting the ECB's more conservative approach, suggesting that other central banks taking a more aggressive approach were storing up problems for the future.
"The independence of the European Central Bank must be preserved and the things that the other central banks are doing now must be reversed," she said.

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