The Associated Press May 10, 2010, 8:13AM ET

UK rates held steady amid election doubts

The Bank of England kept interest rates steady at 0.5 percent and refrained from any further asset purchases Monday as it sought to provide markets with some stability amid ongoing uncertainty about the British general election.

As party leaders jostled for power after last week's national poll resulted in a hung parliament, in which no single party holds a majority, the central bank decided against doing anything to rock the boat further.

Economists said the outcome was anticipated regardless of the inconclusive election because of concerns that Britain's recovery from recession remains in the early stages.

"The Monetary Policy Committee unsurprisingly judged that now is not the time to be raising interest rates as the downside risks to still fragile U.K. economic recovery are magnified by current major political uncertainty and the recent heightened market turmoil resulting from the Greek crisis and contagion effects on other eurozone countries," said IHS Global Insight economist Howard Archer.

British interest rates have been at a record low for more than a year and the bank completed a 200 billion pound ($300 billion) quantitative easing program -- purchasing assets to boost the money supply -- in January.

The next big sign post on the economy will come on Wednesday when the bank releases its quarterly Inflation Report.

Recent data has shown inflation rising stronger than anticipated -- consumer price inflation hit 3.4 percent in March, well above the bank's 2 percent target -- a factor that would usually prompt a tightening of rates to rein in spending.

But most economists suggest that the weakness of the economy is likely to bring inflation back down to target in the coming months, meaning rates may stay on hold into next year.

"We do not expect any monetary policy tightening until early 2011, when the economy will be in better shape," said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club economic consultancy. "The pace of tightening thereafter will be very much dependent upon who forms the next government and how aggressive a program of fiscal consolidation they implement."

Britain's election on Thursday produced a hung Parliament in which no party holds a majority of seats. David Cameron's right-of-center Conservative Party won 306 of the 650 seats in the House of Commons, 20 short of a majority. Prime Minister Gordon Brown's center-left Labour won 258 and the center-left Liberal Democrats took 57 seats.

That has left the Conservatives and Labour scrambling to win the favor of the Liberal Democrats to give them a coalition majority.

If the Conservatives succeed, markets are expecting faster cuts to spending to bring down Britain's huge budget deficit, which rose to a record 152.84 billion pounds ($235.9 billion), or 10.9 percent of gross domestic product, in 2009/10.

If Labour manages to cling to power, it is expected to delay removing stimulus from the economy, warning that to do so would risk the country's economic recovery.

The minutes of this month's Monetary Policy Committee meeting, which was delayed from last Wednesday and Thursday to avoid a clash with general election, will be released on May 19.


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