Additional quantitative easing is looking more and more like the next chosen solution to try and right this economic ship. Additional budget cuts are on deck and the recovery is spotty at best. This points in a direction of needing additional support for the economy. One thing has stayed consistent through it all – the Monetary Policy Committee’s decision to maintain the base rate at the record low of 0.5 per cent.
Most of the Monetary Policy Committee members believe the first boost of pounds into the economy (200 billion) is enough. For others, “the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased”.
The minutes of the last MPC meeting give an accurate depiction of what members are thinking of the recovery. Some members have the belief that, “the headwinds to a recovery in the private sector demand in the UK and overseas were somewhat stronger than previously thought, and that the downside risks to activity had increased”.
The MPC believes that inflation will continue to rise but also worries about inflation going south, and concerns exist that it could drop below the two per cent target rate.
Howard Archer, economist with IHS Global Insight, expects interest rates to stay below 0.75 per cent, at least until the end of the year 2011.
David Kern, chief economist with the British Chambers of Commerce, commented on the importance of low interest rates for businesses, saying: “British businesses require a prolonged period of low interest rates to cope with the major pressures they face, and to enable them to drive a sustainable recovery.” He added: “If signs of a slowdown arise later in the year, the MPC should not hesitate to increase the quantitative easing programme above 200 billion pounds.”