The Bank of England caught no one by surprise and left interest rates on hold at 0.5 per cent, with an unchanged programme of quantitative easing, due to reach £175bn, by the time of the Monetary Policy Committee’s next meeting on 5 November.
The City had talked up the possibility of the Bank cutting the rate of interest it pays on “excess reserves” and were much more excited about the possibility than the Bank ever seemed to me. This was due to the importance of potential movements at the very short end of the yield curve, which are important to traders, but not very important to the economy. It may still happen, but remember the words of Mervyn King, Bank governor, who has always insisted any move in this direction “may be a useful supplement, but will not be a major change”.
Now the focus moves on to the big meeting in November. This is where a big change in policy will occur – either halting gilts purchases or extending them further. So far the economic news has been mixed, so there is no pressing need for the Monetary Policy Committee to change its economic forecasts much. What does that mean for policy? That is the difficult bit. The MPC has to decide how much QE is the right amount of QE. With no experience from the past to be any sort of guide, that is far from easy.