No Rate Change for Bank of England or ECB

Tuesday, 12 October 2010

If you woke up this morning expecting a surprise in the interest rate department, you will be sorely disappointed. On Friday, the ECB and the Bank of England both left official interest rates completely unchanged. For the Bank of England – this is the 19th consecutive month that the rates have stayed where they are.

Low interest rates are obviously good for economic development and growth. We know that because economy theory tells us so – and of course because it makes logical sense. The lower the interest rate, the more business and individuals are willing and able to borrow, and therefore the more they are able to contribute to economic growth.

At the present moment, economic growth is exactly what the economies of the Eurozone (and the UK) need.

Speaking of the Eurozone, the central monetary trend setter also said no to an interest rate change – even though the impetus for a rate drop is certainly present.

The reason for no change in the rate is that despite a number of weak economies in the Eurozone struggling at the moment – there are  a number of other countries which would probably take advantage of a rate drop – to the detriment of the entire area. Germany – of course – is one of these countries.

The announcements which can coupled with the rate decisions were also interesting to read. The Bank of England has completely ruled out new measures for quantitative easing – saying that they are not at a point where that is necessary just yet.

The UK government of course has been deciding on a number of austerity measures to take – given that they were just awarded a mandate to lead after a rough election. It's almost certain that no matter what steps they take to cut public spending and reign in the budget deficit, citizens are not going to be overly happy with the cut backs.

Therefore, it seems that for the moment, the UK is in limbo mode, waiting only for a clearer sign from either the Bank of England, or the Eurozone as a whole – to let them know what to do next. The announcement of the austerity measures in due course will no doubt act as a small shock to the economy – and could send currencies moving in all directions as investors weight up the longer term implications of the coming announcements.