Bank keeps rates and QE policy on hold

The Bank of England’s interest rates setting body voted to keep interest rates at their record low of half a percentage point and to maintain its gilts buying programme, known as quantitative easing, at the current level of £275bn, as expected.

The decision of the Bank’s Monetary Policy Committee on Thursday to hold rates steady follows three closely watched surveys from the services, manufacturing and construction sectors that pointed to genuine, if modest, growth in December. Several economists, noting that those surveys were better than expected, suggested that Britain’s economy might simply be stagnating, rather than contracting, lessening the need for an immediate boost from an expansionary monetary policy.

Moreover, key surveys of the retailing sector and the UK housing market also proved more upbeat than expected, while trading statements from some of the nation’s largest retailers pointed to reasonably brisk sales over the key Christmas period.

And while the Bank is expected to ultimately increase its gilts purchases, economists expect it to delay announcing any plans until February when it reviews economic prospects and issues its quarterly inflation report.

But there are factors weighing against the view of a steady, if not growing, economy. Earlier on Thursday, industrial production and manufacturing data pointed to a much weaker fourth quarter than economists had expected; not only did output for both fall in November but activity levels for October were revised downwards.

Meanwhile, the rebalancing of the economy towards greater reliance on exports that the Bank had hoped would come from a weaker pound appears not to have materialised. Britain's trade gap widened in November, partly due to a drop in sales of goods to countries outside the European Union.