It is five years since the Bank of England’s Monetary Policy Committee (MPC) lowered UK interest rates to 0.5 per cent, where they have stayed ever since, and yesterday’s (March 6) decision was to keep them there for another month.
It is the first decision on the rate since the Bank amended its ‘forward guidance’ policy, which originally linked interest rates to the unemployment figures. However, this was recently changed to ‘fuzzy guidance’, which bases its decisions on rates on how quickly the economy uses up spare capacity.
The MCP has repeatedly stressed that, although the recovery is moving in the right direction, they want to see the overall economy become more balanced and there was evidence of this last week when a breakdown of GDP for the fourth quarter of 2013 revealed a surge in business investment, suggesting that the economy is becoming less reliant on consumer spending.
These figures were released along with the second estimate of GDP for the fourth quarter of 2013, confirming that growth remained unchanged on last month’s projection at 0.7 per cent.
Economic surveys have also signalled a resilient start to 2014 despite the extremely wet weather, with the Markit/CIPS purchasing managers’ index readings over the past week showing firm growth in activity across the services, manufacturing and construction sectors in February.
Meanwhile, although the economy is now in recovery, output remains 1.4 per cent lower than its pre-recession peak following a long period of stagnation but the Bank is still expecting sharp growth this year, upping its forecast to 3.4 per cent last month from 2.8 per cent.
The MCP also announced yesterday that it would keep its £375bn quantitative easing programme unchanged, which was introduced at the same time as the interest rate dropped to its historic low.