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No further QE as interest rates held

THE Bank of England yesterday steered clear of providing any further monetary stimulus to the UK economy in spite of last month's news that gross domestic product fell 0.3% in the fourth quarter of 2012.

At the end of its latest two-day monthly meeting, the Bank's Monetary Policy Committee held UK base rates at their record low of 0.5% and maintained the scale of quantitative easing at £375 billion. QE is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds using central bank reserves.

Incoming Bank of England Governor Mark Carney, who heads the Bank of Canada and will take up his new post on July 1, voiced his belief at the World Economic Forum in Davos in Switzerland last month that monetary policy was not "maxed out" in major economies. And Mr Carney talked at Davos about central banks setting monetary policy which helped economies to reach "escape velocity".

He told the Treasury Select Committee yesterday: "It's entirely possible, in fact probable, the current stance of (UK monetary) policy is consistent with the economy achieving escape velocity."

Stephen Boyle, head of group economics at Royal Bank of Scotland, said of the MPC's verdict yesterday: "With this decision, does the MPC believe a durable recovery is on track, despite GDP falling in Q4 2012 and far-from-stellar business survey results?

"Or does the committee believe that monetary policy is indeed 'maxed out'? Either way, the MPC must retain faith that the Funding for Lending Scheme can provide an additional boost to growth. Because without that, it's difficult to see how (the) decision pushes us closer to escape velocity."

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