The Bank of England will not change the current interest rate and quantitative easing (QE). After injecting a further £75 billion into the economy last month, the Bank announced recently to wait and see if the injection was enough to stimulate growth before they decide to adapt their fiscal policies. Interest rates will remain at a record low of 0.5% while QE will stay at £275 billion after October’s surprise increase.

So, what does this mean? The Bank of England (BoE) can control inflation and boost economic growth by regulating the interest rate. If the interest rate is low, the cost of living and of borrowing for businesses and individuals becomes cheaper. This encourages long-term investments such as buying a car or a house and stimulates economic growth. A low interest rate also decreases the value of the pound. As foreign investors will dump their pounds and invest in other currencies that offer a higher return, the exchange rate will drop to the detriment of the pound. A weak pound will make UK goods more attractive to foreign buyers and increases UK exports. It will also make foreign goods more expensive for UK citizens so they will buy British-made products instead boosting the local economy.

So why doesn’t the BoE keep interest rates low all of the time? While a low interest rate increases demand for UK products and increase wealth within the country it can eventually lead to inflation. If demand for a product exceeds supply, then the product price will go up. When inflation increases, economic growth slows down as high prices will make goods less attractive. Less demand will lead to less production and eventually to higher unemployment.

To keep inflation low the Bank has to raise interest rates. It attracts foreign investors who are looking for high-yield returns on their investment. This increases demand for pounds strengthening its value. A strong currency makes foreign goods more lucrative putting pressure on UK companies to compete with cheaper imported products. If they can’t compete, domestic economic growth will decrease and unemployment rates will rise.

Low and high interest rates have both advantages and disadvantages. That’s why they need to be adapted to ensure a stable economy. The BoE decided to keep the interest rates low to spur the domestic economy. However, the inflation rate raced to 5.2% in September compared to a level of 4.5 % in August (more than double than the Bank’s target of 2%). Next week, the Bank will present the new inflation rate for the last three months. The numbers are awaited impatiently by experts as they will determine the new fiscal policy of the Bank of England.