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Interest Rates and Monetary Policy: Key Economic Indicators

Published Friday, July 21, 2017

Interest Rates and Monetary Policy: Data on interest rates from the UK, eurozone and the US; a summary of the Bank of England’s and international, quantitative easing policy.

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Central banks around the world cut interest rates sharply during the 2007-2009 financial crisis. Rates have stayed at historic lows since then, close to or below 0% in most developed economies.

UK (Bank of England)

The Bank of England’s Monetary Policy Committee (MPC) cut its main interest rate (the Base Rate) from 0.5% to 0.25% on 4 August 2016, the first change since March 2009, and the lowest since the Bank was founded in 1694. The MPC cited the weaker outlook for the economy following the vote to leave the EU as its main reason for cutting rates.

UK interest rates

As well as cutting interest rates by a quarter of a percentage point, the MPC agreed a series of other measures designed to boost the economy, including expanding its expanding its quantitative easing (QE) programme, where the Bank creates new money to buy financial assets from financial institutions, by £70bn (£60bn of government debt and £10bn of corporate debt). Planned QE now totals £445 billion.

The MPC has left interest rates and policy unchanged, including at its latest June meeting. However, the vote to keep rates unchanged was closer than most observers expected; the MPC voted 5-3 in favour of keeping policy unchanged. Three MPC members were concerned by inflation rising faster than it had anticipated, to 2.9% in May, above the Bank’s 2% target, and voted to raise rates.

Eurozone (European Central Bank)

The European Central Bank (ECB) lowered its main interest rate for the Eurozone to 0.0% and the deposit rate to -0.4% in March 2016. The ECB is also conducting a QE programme, intended to stimulate the economy, whereby it buys €80bn worth of assets (mostly government bonds of Eurozone countries) a month. On 8 December, the ECB announced it will reduce QE purchases to €60bn per month starting from April, which it did. Policy was left unchanged in July 2017.

United States (Federal Reserve)

The US Federal Reserve increased its main interest rate by 0.25%-points at its June policy meeting to a range of 1.0-1.25%. Rates have been increased gradually from 0-0.25% since December 2015 against a backdrop of jobs growth and steady economic growth.

 

Commons Briefing papers SN02802

Authors: Daniel Harari; Anna Moses

Topics: Economic policy, Economic situation

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