‘Historic’ low interest rates in Britain likely to stay ‘for years’
LONDON: Expectations were growing in the City of London — UK financial district — last night that UK interest rates could remain at historically low levels for years after the Bank of England (BoE) gave a strong hint that it might again expand its policy of flooding the economy with money.
Markets were taken by surprise yesterday when minutes of the latest meeting of the Bank's monetary policy committee showed that the governor, Mervyn King, had wanted to pump an extra £75 billion into the financial system but was outvoted.
Gerard Lyons, chief economist at Standard Chartered Bank, said it was now possible that King would not raise interest rates from their current all-time low of 0.5 per cent during his current term as governor, which lasts until mid-2013.
"The Bank should be congratulated on their practical response to this crisis. There is no way that the Bank of England is going to prematurely tighten policy," he said.
Other economists said that because whichever party winning next year's election would have to cut spending and raise taxes to close the enormous budget deficit, the resulting fiscal squeeze would mean interest rates would probably be kept very low to keep the economy moving.
King, along with external members Tim Besley and David Miles, voted to raise the Bank's policy of quantitative easing by £75 billion to £200 billion in an attempt to ensure that economic recovery takes hold.
The other six members, though, were only prepared to sanction a rise of £50 billion.
The vote marks only the third time since he became governor in 2003 that King has been outvoted and the first time that none of the Bank's internal MPC members has voted with their boss.
The pound fell sharply as traders digested the news that King was more gloomy about the economy than previously thought — despite his warnings last week that any recovery could be 'slow and protracted'.
Sterling had recovered some of its losses by the close, however, to trade around $1.65 and Euro1.16.