Interest rates frozen again

THE Bank of England continued to sit tight in March as fears of a double dip recession diminished.

Interest rates were left at a record low of 0.5 per cent while its quantitative easing programme, which finished last month, has been put on ice.

However, the Bank has left the door open for further action if the economic recovery hits shaky ground.

Economists are nevertheless questioning the impact of a year’s worth of gilt and corporate bond purchases.

Vicky Redwood of Capital Economics believes that without it the UK would still be in recession although the £200bn QE programme has not been successful enough to kick-start a strong economic recovery. She estimates it has boosted GDP by as much as 2 per cent to 3 per cent over the past year.

“On the face of it, QE appears to have had little effect on the economy. Bank lending and the broad money supply have remained weak.

"And while asset prices have risen sharply, QE has not been the only factor at play. The biggest success of the policy has arguably been a rise in corporate bond and equity issuance, but the proceeds have mainly been used to repay bank debt rather than spent.

“However, the economy would have been even weaker without QE. Bank lending and the broad money supply would in all likelihood have fallen sharply.”

The UK, which was the last of the developed nations to emerge from recession after contracting for six consecutive quarters, returned to growth in the final quarter of 2009.

Revised figures released last week a stronger services sector and higher industrial production levels boosted economic growth to 0.3 per cent between October and December.

This growth appears to have been sustained into 2010 with the latest service sector figures showing a sharp pick-up in activity levels in February to hit a three-year high.

The Markit service sector purchasing managers survey (PMI) reported business activity in February growing at its fastest rate since January 2007 from a balance of 54.5 to 58.4.

Meanwhile the manufacturing purchasing managers' index soared to a 15-month high in February, raising hopes that the sector is in for a decent first quarter.

Nationwide’s Consumer Confidence survey showed consumer confidence hit a two-year high in February, while the latest Confederation of British Industry distributive trade survey also showed a strong improvement following a dip in January.

The one glitch appears to be house prices with surveys from both Nationwide and Halifax reporting a big drop in February with three month figures also showing a slowdown.