ITEM Club comments on today's interest rate decision

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Nida Ali, economic advisor to the EY ITEM Club, comments on today’s interest rate decision:

  • This was a crucial month for monetary policy, but the MPC's decision to hold off on more QE is unsurprising
  • MPC members are in wait-and-see mode to judge how their other policy initiatives, such as the FLS, feed into the economy
  • We believe that the FLS could help to boost lending in the UK and agree with the MPC's decision to keep policy unchanged

“This was a pretty crucial month for monetary policy. The previous round of asset purchases came to an end this month, while surveys and recent data releases have indicated that the economic outlook remains weak, building the case for a further loosening of monetary policy. 
 
“Despite these developments though, the MPC's decision to hold off on more QE is unsurprising, not least because recent speeches by MPC members had been trailing the decision. These speeches have suggested that they are becoming sceptical about the effectiveness of QE, given that gilt yields are already at record lows. MPC members also appear to be in wait-and-see mode to judge how their other policy initiatives - especially the Funding for Lending Scheme (FLS) - have impacted the economy. There is a sense that they now see this as their most effective policy tool.
 
“We believe that the FLS, especially coupled with a relaxation of capital controls by the Financial Services Authority, does have the potential to boost lending in the economy. As such, we agree with the MPC's decision to hold off on more QE.”