Base rate must stay low for a while yet

by Ed Bowsher on 05 November 2009  |  1 comment
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The Bank of England is only going to print a further £25 billion in its Quantitative Easing programme. At least for now. With that background, the Bank mustn’t increase the base rate too soon.

Today's news from the Bank of England was a mild surprise. The majority of economists had expected the Bank to say it would create a further £50 billion of fresh cash as part of its Quantitative Easing (QE) programme. Instead the Bank said it would only print a further £25 billion, taking the total to £200 billion. 

It's perfectly possible that the Bank may decide to extend the programme further in three or four months' time, but I get the impression that QE is beginning to wind down. That's not necessarily a bad thing, we can't carry on printing money forever. 

But the news just strengthens my belief that the base rate ought to stay low for most of 2010. The Bank will be reducing the monetary stimulus by winding down QE, and a new Conservative government will almost certainly reverse the fiscal stimulus with expenditure cuts and tax rises. Both of these moves will act as a brake on growth and I fear the economy couldn't withstand further pressure from a rising base rate.

Let's hope the Bank doesn't consider raising the base rate until we have a much clearer idea of the Tory tax plans. Which won't be till next summer.

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