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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.

 
Bank of England holds fire as hopes pinned on European action

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.

The wait-and-see attitude was expected, with the bank’s ‘funding for lending’ scheme, designed to get commercial banks lending again, also having only just been activated.

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.’

6 comments so far. Why not have your say?

Anthony Tinslay

Aug 02, 2012 at 13:11

Encouraging remarks from Mr Draghi and the world is waiting for the action to follow. However the real problem is that Mr Draghi is just the man in charge but the members of his Governing Council represent several different countries each of whom will be mainly be taking care of his own country's interest above the interest of Europe as a whole. The world is holding breath!!

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Geoff Downs

Aug 02, 2012 at 15:31

Your comment Anthony sums up the problem. You seem to believe that if Governments and World Banks could just take action rather than talk we would be o.k. The truth is they don't have a solution to the debt crisis. They are very clever though because significant numbers of investors think they do have the answers, that is why markets are rising. The economic news is bad but markets rise, the debt problems are huge, but markets rise, all on the belief the Fed. and World Banks will solve the problem. No one has found the answers yet and if they don't there will be a massive crisis and markets will crash.

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Alan Tonks

Aug 02, 2012 at 17:03

The Bank of England has done nothing to boost the economy the total opposite in my opinion. I have often wondered if they know, what the word economy actually means.

If the so-called economists at the Bank of England had any sense whatsoever, they wouldn’t have used quantitative easing.

What is the point of using funny money to boost the economy, it’s like a mine with paper props, totally ridiculous?

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snoekie

Aug 02, 2012 at 17:26

The fact remains that the politicians are responsible, they left their brains at home whilst they ran up, or allowed to be run up massive debts and bubbles.

Now they do not know how to deal with what has happened, other than in some instances running up more debt which is likely never to be paid back, if they do incur more debt. Are you listening Silliband/Balls?

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David Rowse

Aug 02, 2012 at 19:30

Snoekie

In many respects I believe that you are absolutely correct - politicians are completely out of their depth and have no idea what to do. They consult so called experts at enormous expense and then appear to bluster and 'dither'.

I am certain that at some time and somewhere some general must have advised, "never try to defend the indefensible". And yet this appears to be exactly what is happening.

I guess that there will be tears before bed time.

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Anonymous 1 needed this 'off the record'

Aug 03, 2012 at 18:00

And doubtless a story, an "austere" comforter and some thumb-sucking whilst the Kinder get their schlafe ..., rather than the slap round the faces that they roundly deserve. I really do not know how the remainder of Europe were suckered into believing that Gerrnan reunification would not come at the price of their infestation of economic thought.

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