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BoE Retains QE Intact; Interest Rate Steady At 0.50%

BoE Retains QE Intact; Interest Rate Steady At 0.50%
4/5/2012 8:14 AM ET

Bank of England maintained the size of its bond purchases unchanged, as concerns about a technical recession ease and inflation remains sticky due to elevated oil prices.

The nine-member Monetary Policy Committee decided to leave the quantitative easing unchanged at GBP 325 billion. Also, the committee retained the benchmark interest rate at its record low level of 0.50 percent.

The voting panel is likely to have seen pressure mounting from some members to boost the stimulus. The minutes of the meeting is due on April 18.

In March, David Miles and Adam Posen sought a GBP 25 billion increase in monetary stimulus as they assessed that loosening is needed to stimulate demand.

In a note, British Chambers of Commerce's Chief Economist David Kern said a further GBP 25 billion in QE would be unnecessary as it would have only a marginal effect. But the MPC should reconsider its reluctance to include assets other than gilts, such as securitied SME loans, in the QE programme, he said.

Economists see chances of more QE at the May meeting, when the additional round of bond purchases will be exhausted. By the next month, policymakers are likely to get a clearer picture of inflation and growth outlook from the quarterly Inflation Report.

Capital Economics UK Economist Samuel Tombs expects the MPC to revise up its inflation forecast next month to account for its probable near term "stickiness."

IHS Global Insight's Chief UK Economist Howard Archer said another boost will be delayed until the third quarter, given the recent improved economic news. Also, the interest rate is seen unchanged at the current level until at least late 2013.

The economy is likely to avoid a recession amid signs of improvement in economic performance. The BCC forecasts the economy to expand 0.3 percent in the first quarter of 2012.

On the other hand, the Organization for Economic Co-operation and Development sees a technical recession in the U.K., with GDP falling 0.4 percent in the first quarter, after contracting in the final quarter of 2011.

The BoE will remain cautious in its interpretation of the data and it suggests the BoE will not be in a hurry to change policy, said ING Bank NV's economist James Knightley.

Inflation slowed for a fifth consecutive month in February to reach the lowest in fifteen months. The rate fell to 3.4 percent from 3.6 percent in January.

The BoE expects inflation to fall back to its 2 percent target by the end of 2012. However, there are risks to inflation that it might fail to fall back as expected due to rising oil prices.

by RTT Staff Writer

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