Bank to make interest rate decision

The Bank of England is today deciding on pushing interest rates below one per cent and launching its quantitative easing measures.

A cut of 0.5 per cent is widely expected – putting the base rate to 0.5 per cent – although the decision is far from set in stone, with the monetary policy committee (MPC) admitting the effect of interest rate cuts at such a low level was limited, while more reductions were putting greater pressures on banks and building societies already stretched.

The Council of Mortgage Lenders (CML) has stated while a rate cut will be welcomed by mortgage holders with variable rate deals, lenders are trapped need to hold up rates to keep savers and funding.

"While some mortgage holders may hope for an interest rate cut tomorrow, it would not be welcomed by savers, lenders or would-be borrowers," the body stated.

"Retail savings are now a vital source of funding for new mortgage lending. In a sustained low interest rate environment it becomes increasingly difficult for lenders to reward existing borrowers with low mortgage rates and offer competitive savings rates to attract deposits."

With interest rates now so low, the attention of the MPC turns to unconventional monetary policy tools and quantitative easing.

The MPC could tomorrow unveil plans for a first tranche of quantitative easing – increasing the quantity of money in the economy through directly purchasing assets on the markets.

The term quantitative easing is often characterised as the Bank printing more money – with the permission of the Treasury – as the purchase of assets will be funded by the creation of new money.

At first the MPC is expected to focus on purchasing government bonds from the markets, but it could be expanded to buying a mix of private sector assets – including mortgage-backed securities, commercial paper, corporate bonds, and even equities.

David Kern, chief economist at the British Chambers of Commerce (BCC), has called on the Bank of England to ensure quantitative easing is decisive and transparent.

"The main aim from now on must be to launch quantitative and credit easing in a manner that helps restore business and consumer confidence," he said.

"To alleviate the recession, it is important that the quantitative measures are forceful and decisive. It is important to avoid undue timidity."