Bank of England keep rates at 5.75%

6 Sep 07

Today, the Bank of England decided to keep rates on hold at 5.75% and it seems unlikely that they will tighten monetary policy this year. The inflation rate has currently dropped below the BoE's inflation target of 2%.

This is in light of the recent financial turmoil in the markets over the credit squeeze from problems originating in the subprime lending market in the US. Rates were kept on hold as the Bank was wary on how much of an effect the recent credit crisis could have on the real economy.

Many banks and financial institutions have been affected by the current subprime problems. They have found it quite hard to finance short term spending due to the large increase in the interbank lending rates. It therefore means that central banks like the BoE have to intervene to inject liquidity into the market, as has been done by the Fed and the ECB.

Lehman Brothers has in fact decided to cut 850 jobs in an attempt to reconstruct its mortage business in the US and UK. This represents a much bigger tide - firms are starting to move away from securities backed by mortages and other assets.

Links:
Bank of England keeps rate at 5.75% - The FT
Lehman Brothers cuts 850 jobs - The FT