Bank of England ‘to stick’ with record-low interest

AFP | APRIL 4, 2012

The Bank of England is forecast to keep its main interest rate at a record-low 0.50 percent and maintain its level of cash stimulus when it meets on Thursday, as Britain stands close to recession.

Since the BoE’s last monetary policy meeting in March, official data has revealed that Britain’s economy contracted by a worse-than-expected 0.3 percent in the fourth quarter.

Another contraction in gross domestic product in the first three months of 2012 would place Britain back in recession, which is defined as two successive negative quarters. Official first-quarter GDP data is published this month.

To aid Britain’s recovery, the BoE’s nine policymakers in February voted to lift the central bank’s quantitative easing (QE), or stimulus programme, by £50 billion to £325 billion (388 billion euros, $514 billion).

The BoE main lending rate has stood at 0.50 percent since March 2009, when the central bank also began to inject the economy with £200 billion under the radical QE policy.

Under QE, the central bank creates new cash that is used to purchase assets such as government and corporate bonds in the hope of boosting lending by retail banks and in turn growing the economy.

“The BoE meets on Thursday this week and we expect no change in either interest rates or in asset purchases,” said research director Kathleen Brooks at trading site Forex.com.

“However, we believe that the deterioration in economic data along with the fiscal consolidation programme being implemented by the government means that the bank will need to do more QE in May.”

The BoE had voted unanimously at its last meeting in March to maintain the level of the central bank’s main interest rate, but policymakers David Miles and Adam Posen also wanted to increase QE funds by £25 billion.

“The MPC appears increasingly divided between those members who want to provide the economy with more stimulus and those who think that they have now done enough,” said Vicky Redwood, an analyst at the Capital Economics consultancy.

“For now, the doves seem to be in the minority. And the extra quantitative easing started in February is not finished yet anyway. But we still think that further asset purchases are likely to be announced later this year.”

Britain has been hit hard by the combined impact of painful state austerity measures, elevated oil prices and the ongoing sovereign debt crisis in key trading partner the eurozone.

The OECD think-tank last week said it believed that Britain was already back in recession, in contrast to the British Chambers of Commerce, which has cited an “encouraging” pick-up in economic activity in the past three months.

Alistair Cotton, senior analyst at Currencies Direct, said BoE policymakers were facing “mixed messages” about the overall health of Britain’s economy.

“Most of the BoE’s decisions tend to be clear and straightforward, but in the past week the economic picture has become much less clear,” he said.

The Bank of England’s main task is to use monetary policy tools to try and keep Britain’s annual inflation rate close to a government-set target of 2.0 percent.

This has proved tricky in recent times because of elevated oil prices. Nevertheless, the 12-month inflation rate fell sharply in February to a 15-month low of 3.4 percent thanks to falling electricity and gas bills.