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Bank of England holds fire as hopes pinned on European action
Bank's monetary policy committee keeps base interest rate on hold at 0.5% and announces no extension to QE programme.
The Bank of England has refrained from taking any further measures to boost the worsening British economy today, with investors' hopes instead pinned on action from the European Central Bank (ECB).
The Bank of England’s monetary policy committee, meeting for the first time since it was revealed that UK GDP contracted by 0.7% in the second quarter of the year, kept interest rates at their record low of 0.5%.
The nine-man committee also voted against extending its quantitative easing programme of asset purchases, as the £50 billion extension announced just one month ago – taking the total stock of purchases to £375 billion – will take four months to complete.
Financial markets though are more interested by the European Central Bank’s policy decision, also due today. They are hoping that ECB chairman Mario Draghi will fulfill his recent pledge to do ‘whatever it takes’ to save the euro.
The ECB could cut interest rates, but some form of scheme to buy up peripheral countries’ bonds – possibly the reactivation of the securities market programme (SMP) – is thought most likely, in a move designed to bring down the borrowing rates of Italy and Spain.
US Treasury secretary Timothy Geithner added pressure on the ECB to act, yesterday saying the eurozone must take steps including ‘bringing down interest rates in the countries that are reforming and making sure those banking systems can provide the credit those economies need’, in an interview with Bloomberg Television.
Many investors and economists though fear that Draghi may not live up to market expectations. Dario Perkins of Lombard Street Research says: ‘The market is now expecting significant policy action at tomorrow’s ECB meeting. Restarting the Securities Markets Programme (SMP – basically targeted purchases of Italian and Spanish debt) is just about the minimum investors are anticipating.
‘The problem is that apparently Mr Draghi does not yet have the full support of his governing council.’
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