Bank of England holds interest rate at 0.5% and continues QE at more modest level

The MPC at the Bank of England has decided to hold its interest rate at 0.5% today and to extend its use of quantitative easing by a further £25bn over the next three months on top of the £175bn already authorised by the Chancellor.

It was a finely balanced decision.

The decision on interest rates was not surprising and is right for where we are in the cycle.  The risk in the QE decision is in the MPC's own words that inflation will likely rise sharply in the 'near term' above its 2% target from its current low level of 1.1%. The additional QE money is designed to encourage the current positive signs of growth and provide some further momentum for a recovery. Although £25bn will not 'break the Bank' and is not the 'extensive' use of QE that had been feared, it could be enough to build up unhelpful inflationary pressures in the system.  The QE intervention makes sense since the risks are all on the downside in the short term.  We can only hope that by the time it is used up over the next 3 months, we will not still be in a situation where further extensions are required.

We should watch how the market responds. Creating liquidity through QE should lead to an expansion of lending and working capital flows, which should lead to more demand and corporate headroom to grow and this should lead to increased economic growth as the demand feeds on the excess capacity we have in the system. The doom scenario is one where much of the liquidity feeds straight through to higher prices and inflates another asset bubble, but let's not go there.

It will be interesting to see what is contained in the Bank of England Inflation Report which the MPC had sight of and which is due out for public consumption on 11 November.