The Bank of England announced today that the Monetary Policy Committee (MPC) has decided to leave interest rates unchanged at 0.5% in November. There will also be no expansion of the quantitative easing programme. The decision comes in the same week that both the Australian and Indian Governments decided to raise interest rates. By contrast in the United States, the Federal Reserve commenced with a second round of monetary stimulus measures by injecting $600bn into the buying of US Treasury securities in order to boost a flagging US economy.
The UK and more specifically the Bank of England sits somewhere in the middle between these two approaches; neither as hawkish as the Indian and Australian Governments on the one hand, nor as liberal as their US counterparts on the other. We are beginning to see a distinct gap in the responses of the UK and US authorities in particular; this is of course notwithstanding the mind-boggling sums of money the Bank of England has already injected into the UK economy.
This is especially clear if we consider for a moment that the UK has already embarked upon aggressive fiscal retrenchment, whereas in comparison the US authorities have sought to delay fiscal tightening while the global recovery is still weak. This divergence in policy is considerable, with the UK flying the flag of fiscal conservatives, and the US employing the more Keynesian approach of invest in order to recover.
A more hawkish approach to monetary policy would at present be damaging for North East businesses therefore today’s announcement is welcome. A rise in the cost of debt maintenance at the present time is not what businesses or households for that matter need. The Bank of England appears not to be ruling out future QE which is wise; we must hope of course that this is not needed.
Who is right is quite literally the billion pound/dollar question. No doubt it will take a little time before historians begin to commentate on whom indeed was right. In the meantime businesses in the North East and the UK can only hope that it was the UK Government and the Bank of England, rather than the US Government and the Federal Reserve that made the right call: we shall see.
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