The bank of England has once again decided to keep interest rates at the all time low of 0.5%. It also maintained the recently upwardly adjusted asset purchase programme at £325 billion.

Are we now looking at this as the third anniversary of this low interest rate environment of maybe a decade or more of them yet to come?

The European Central Bank also maintained its interest rates at 1% this afternoon. This is despite the re-emergence of inflation, but ECB head Mario Draghi said that the Eurozone economy was now displaying ‘signs of stabilisation’.

The full statement from the BOE reads:

8 March 2012

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to continue with its programme of asset purchases totalling £325 billion financed by the issuance of central bank reserves.

The Committee expects the announced programme of asset purchases to take another two months to complete. The scale of the programme will be kept under review.

The minutes of the meeting will be published at 9.30am on Wednesday 21 March

Mike Paterson of MSP Foreign Exchange Services said that the BoE decision was “As expected. Little change since the news but China was a large seller of GBPUSD prior which has knocked back the Pound across the board.”

Nida Ali, economic advisor to the Ernst & Young ITEM Club, said “Given that we are in the middle of a tranche of asset purchases there was never any realistic prospect of a change in policy this month. Indeed, it is likely to be quiet on the monetary policy front for some time now. It seems that the MPC is quite comfortable with their policy response so far and their projections, for both inflation and growth, in the latest inflation report were pretty upbeat and followed by a positive tone in their recent minutes.

“As such, we don't expect the MPC to authorise any further asset purchases while interest rates remain at 0.5% until at least next year.

“While we agree that recent data has been firmer, suggesting that GDP growth will probably be positive in Q1, we are more downbeat than the MPC about the outlook beyond that. The potential for an escalation of the Eurozone crisis still represents a significant threat to UK's financial stability and we would urge the MPC to have contingency plans in place in the event that the Eurozone crisis worsens.”

Jeremy Batstone-Carr, Chief Economist at Charles Stanley, said “Happy 3rd Anniversary. No change in Bank policy! This meeting marks the 3rd anniversary of UK base rates at just 0.5%. The asset purchase target was left at £325bn. The Bank of England is not forecasting that UK base rates will rise before 2014 although there are dissenting voices.

Certain lenders have raised mortgage rates lately, in response to rising funding costs. This may dampen household demand and act as a potential constraint on growth.

The Bank’s MPC extended its asset purchase programme by £50bn in February. The programme of gilt-edged purchases is spread over three months so expect no change in the Bank’s QE until the next Quarterly Inflation Report and re-forecast in May outwith a marked escalation in the Eurozone sovereign debt crisis.

At present there are no plans to expand the range of existing asset purchases but it remains too early to say “that’s it” to more QE especially if activity levels disappoint going forward.

All 9 MPC members voted for additional QE in February but in a growing divide 2 members (David Miles and Adam Posen) voted for more than £50bn and yet others seemingly lost confidence in the programme.

Although consistently voting with the majority, Martin Weale, Charlie Bean and Paul Fisher have made “hawkish” comment of late. Mr Weale’s comments were particularly noteworthy as he indicated that the first UK base rate hike could come before the envisaged 2014 date anticipated by the financial markets if upside risks to the medium-term inflation target emerged.

Sir Mervyn King, the Bank’s Governor, continues to reject a UK LTRO on the basis that UK banks have already benefited from substantial liquidity. Note that a number of UK banks participated in the ECB’s latest LTRO, somewhat obviating the need for a UK LTRO.”

Dr Joerg Kraemer, Chief Economist Commerzbank AG, said of the ECB decision “At today’s press conference ECB president Draghi did not say anything concrete on how to limit the surge in the Bundesbank’s Target claims. The Bundesbank will not push through tighter collateral requirements which would limit the peripheral countries’ ability to finance their current account deficits via Target loans. Apart from this, Draghi said that the ECB did not discuss to raise rates despite higher inflation.

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