Bloomberg News

Bank of England to Hold Off Raising Rates on Faltering Recovery

June 04, 2011

June 4 (Bloomberg) -- The Bank of England will hold off increasing its benchmark interest rate next week as manufacturing and services surveys this week indicate the economic recovery is faltering.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will leave the key rate at a record low of 0.5 percent on June 9, according to all 55 economists in a Bloomberg News survey. It will also keep its bond-purchase plan at 200 billion pounds ($326 billion), said all 35 economists in a separate poll.

JPMorgan Chase & Co. and ABN Amro Bank NV this week pushed back their forecasts for the first U.K. rate increase, with the latter now projecting no move until 2012. While inflation is more than twice the central bank’s 2 percent target, officials are concerned the economy may not be strong enough to sustain policy tightening as the government cuts spending to reduce the budget deficit.

“It seems most members are willing to allow higher inflation for longer in order to support the economy,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “The MPC will now wait until next year, when most of the fiscal consolidation measures have been implemented and the economy regains momentum.”

The MPC has split on the direction of policy, with Andrew Sentance voting for a half-point increase in May, Spencer Dale and Martin Weale for a quarter-percentage-point rise and Adam Posen for an expansion of the bank’s bond-purchase program. Sentance’s departure at the end of last month has cast doubt on whether the number of policy makers supporting a rate increase will be maintained this month.

Rate Forecasts

Barclays now sees the Bank of England raising its key rate in November rather than August, it said yesterday. JPMorgan also pushed back its forecast to November last week.

Investors are betting on a quarter-point rate increase in March, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. Three weeks ago, they were betting on November.

U.K. manufacturing grew at the slowest pace in almost two years in May, according to a June 1 survey published by Markit Economics. Services growth also cooled last month on weaker household spending and the impact of an additional public holiday at the end of April.

Separately, the Office for National Statistics said last week that construction orders fell 23 percent in the first quarter, the most in 23 years.

There are “renewed signs of economic softness in the U.K. and globally,” Barclays economists including Simon Hayes in London said in a note yesterday as they changed their interest-rate call. “The latter is of particular concern given the U.K.’s current dependence on external demand.”

--With assistance from Mark Evans in London. Editors: Fergal O’Brien, Patrick Henry

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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