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Interest Rates and Monetary Policy: Key Economic Indicators

Published Friday, December 9, 2016

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). Total planned QE now totals £445 billion.

At its latest November meeting, the MPC left interest rates and policy unchanged. It forecast inflation to rise above its 2% target in 2017 as a result of the recent fall in sterling. The MPC stated it would not react to this by raising rates as it expected sterling’s impact to be temporary.

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 2017. Interest rates were left unchanged.

United States (Federal Reserve)

The US Federal Reserve increased its main interest rate by 0.25%-points in December 2015 to a range of 0.25-0.5%. This was the first increase since 2006. It was left unchanged at its latest meeting on 21 Sept. It was left unchanged at its latest meeting on 2 Nov, although many expect a rate hike to occur at its 13-14 Dec meeting.

 

Commons Briefing papers SN02802

Authors: Daniel Harari; Anna Moses

Topics: Economic policy, Economic situation

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