Bloomberg News

BOE Keeps Key Rate at Record Low as Recovery Momentum Eases

June 09, 2011

(Updates with comment from economist in fourth paragraph.)

June 9 (Bloomberg) -- The Bank of England kept its benchmark interest rate at a record low as data pointing to a loss of momentum in the recovery kept policy makers focused on aiding economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the key rate at 0.5 percent, as forecast by all 55 economists in a Bloomberg News survey. The bank also left its bond-purchase program at 200 billion pounds ($328 billion), as predicted by 35 economists in a separate poll.

King’s push to keep interest rates unchanged to bolster the recovery won the backing of the International Monetary Fund this week, which said it’s appropriate to maintain the “current scale of monetary stimulus.” While inflation is more than twice the bank’s 2 percent target, support for tighter policy within the MPC may have been eroded by Andrew Sentance’s departure in May, a year after he first called for higher rates.

“The MPC has clearly shifted their focus much more toward growth than inflation,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “I think the majority is willing to allow higher inflation for longer to support the economy.”

Beaumont, who said data in the past few weeks “show the soft patch is likely to continue,” forecasts the first interest-rate increase in February.

The pound rose 0.1 percent after the announcement and traded at $1.6418 as of 12:19 p.m. in London.

ECB Decision

The European Central Bank will also keep its benchmark interest rate unchanged at 1.25 percent today after raising it in April, according to a separate Bloomberg survey. The decision will be announced at 1:45 p.m. in Frankfurt.

The pace of the U.K. recovery may be curbed by Chancellor of the Exchequer George Osborne’s spending cuts to reduce the budget deficit. He said this week he will stick to the fiscal plan, which the IMF said “remains essential to achieve a more sustainable budgetary position.”

The U.K. economy stagnated in the six months through March, while consumer spending slumped the most in almost two years in the first quarter. Surveys last week pointed to a further weakening, with manufacturing expanding at the slowest pace in 20 months in May and services growth also cooling. Markit Economics Ltd., which published the data, said they indicate economic growth this quarter may not exceed 0.3 percent.

Home Retail Group Plc said today that sales at its U.K. store chain Argos declined in the first quarter, as trading conditions were “more difficult and volatile than expected.”

Fragile Confidence

“While the headline rate of inflation is high, consumer spending is flat, consumer confidence is fragile, and the impact of the fiscal retrenchment is starting to come through,” said David Tinsley, an economist at National Australia Bank in London. The bank’s rate setters “should sit tight.”

Investors are betting on a quarter-point rate increase in April, according to forward contracts on the sterling overnight interbank average compiled by Tullett Prebon Plc. Less than a month ago, they were betting on November 2011.

The majority of the MPC favoured keeping the key rate unchanged as the budget squeeze restrains growth and plans to cut more than 300,000 public sector jobs erode confidence. Sentiment has also been weakened by an inflation rate that rose to 4.5 percent in April, the fastest since October 2008.

IMF Outlook

The IMF lowered its 2011 U.K. growth forecast this week to 1.5 percent from 1.7 percent in April. It sees growth accelerating to 2.5 percent in the medium term.

While Bank of England Chief Economist Spencer Dale, who has voted for a quarter-point rate increase since February, said last month he’s concerned about growth, he added that he’s “even more worried about inflation.” Markets Director Paul Fisher said last week that he wants to be sure the economy is over its “soft patch” before rates are raised.

Ben Broadbent, who joined the MPC on June 1 to replace Sentance, voted for the first time today. Minutes of the meeting will be published on June 22.

“I do think Sentance leaving opens the way for a bit more consensus on the committee,” said Tinsley. “We forecast an increase in November, but it could well be that they don’t move until next year.”

--With assistance from Mark Evans, Jennifer Ryan and Scott Hamilton in London. Editors: Fergal O’Brien, Simone Meier

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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