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Bank to keep rates at record low

04 - 03 - 2010

LONDON (Reuters) – The Bank of England looks set to keep its powder dry on Thursday as it pauses to assess the impact of the massive stimulus it has already injected into the economy.

It is now a year since the central bank slashed interest rates to a record low 0.5 percent and began buying bonds in an unprecedented attempt to kickstart growth.

The experiment with quantitative easing has been regarded as a success by policymakers who say the recession would otherwise have been much deeper.

But Britain’s recovery remains fragile and the Bank has indicated it is prepared to restart its quantitative easing programme — halted at 200 billion pounds last month — if the economy deteriorates.

Economists polled by Reuters were unanimous in forecasting interest rates would remain at 0.5 percent this month and all but one predicted the Bank would hold fire on quantitative easing.

“The odds strongly favour the Monetary Policy Committee keeping the quantitative easing programme on hold, particularly as the latest data suggest that economic activity bounced back in February from a weather-related hit in January,” said Howard Archer at Global Insight.

The economic newsflow over the past month has been mixed. Retail sales dived at the start of the year, hit by snow-related disruption and a rise in VAT. But purchasing managers’ surveys suggest both manufacturing and services sectors enjoyed a strong rebound in February.

Britain’s economy expanded by 0.3 percent in the fourth quarter of last year after an 18-month long recession that wiped out more than 6 percent of output.

Heavy snow in January, which forced thousands of businesses to close, has made recent data hard to interpret and the Bank is likely to wait for the economic fog to clear before making any policy changes.

Uncertainty about fiscal policy is also clouding the picture. An election is due by June at the latest and recent opinion polls have pointed to a hung parliament, where no party has an outright majority.

Fears an incoming government will struggle to take the tough action needed to curb the budget deficit sent sterling to a 10-month low against the dollar at the start of this week.

Renewed weakness in the pound could put upward pressure on inflation which, at 3.5 percent in January, is running well above the central bank’s target. However, the Bank is confident that price pressures will ease later in the year.

Source: Reuters UK, Thursday 4th March 2010

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