China’s central bank yesterday cut its benchmark interest rate for the first time since 2008 in a surprise move, as British policymakers held back from pumping more cash into the flagging UK economy.
Business leaders praised the Bank of England for maintaining quantitative easing (QE) at its current level of £325 billion while holding borrowing costs at their record low of 0.5 per cent.
Economists said the Bank’s nine-strong monetary policy committee (MPC) would have “seriously considered” additional money printing. However, yesterday’s no-change decision came just hours after a closely-watched survey of Britain’s powerhouse services sector revealed robust growth last month.
In China, central bankers moved to prop up economic growth by dropping the key one-year deposit rate to 3.25 per cent from 3.5 per cent. Chinese lenders were also given additional flexibility to set competitive lending and deposit rates.
Qinwei Wang, an economist at Capital Economics in London, said: “It’s obviously a very strong sign that the government wants to boost the economy, given the current weakness, especially in demand.”
Pressure on the Bank of England to launch fresh stimulus measures has been mounting after official figures showed the UK’s double-dip recession was deeper than previously thought.
Christine Lagarde, head of the International Monetary Fund (IMF), also called on the Bank to lower interest rates to help the UK weather the eurozone crisis.
At the same time, inflation has been coming off the boil, providing leeway for more QE.
David Kern, chief economist at the British Chambers of Commerce (BCC), which represents tens of thousands of UK businesses, said: “The MPC’s decision to maintain current levels of quantitative easing was the right one.
“Though the clamour for increasing the asset purchase programme has intensified with the worsening eurozone situation, and signs that the US and Asian economies are slowing, the benefits of additional QE would be marginal at present.
“However, if conditions in Europe worsen… then there could be a risk to the UK financial system. In that case, additional QE might be necessary over the next couple of months.”
The BCC renewed its call for alternatives to QE such as the introduction of a zero per cent or negative interest rate for deposits held by commercial banks at the Bank of England.
A run of dire economic data that has spooked the UK’s recovery hopes was halted yesterday with a decent performance by the services sector, which accounts for more than two-thirds of the economy.
The Markit/Cips’ purchasing managers’ index came in at 53.3 in May, unchanged from April and confounding expectations for a dip to 52.5.
David Tinsley, UK economist at French bank BNP Paribas, described the outcome as “positive”, saying that it pointed to momentum in the economy.
He added: “For the MPC to push the button on more QE in July we will most likely need to see some signs that external weakness is beginning to leech further into final domestic demand.”
Minutes from yesterday’s MPC meeting, detailing the votes, will be released later this month.