Bank of England holds interest rate at 0.50 per cent

THE Bank of England (BoE) on Thursday held its key interest rate at a record low 0.50 per cent, where it has stood for almost three years, amid ongoing turmoil for Britain’s economy and the eurozone.

The BoE’s Monetary Policy Committee (MPC) also voted to keep its economic stimulus at 275 billion (323 billion euros, $432 billion), to help boost lending by banks, it said in a statement issued after a two-day meeting.

The news, which was in line with market expectations, came shortly before the European Central Bank (ECB) cut its own interest rate by a quarter point to 1.00 per cent as the eurozone courts recession and EU leaders seek to save the euro.

Economists said the Bank of England would want to see inflation subside before pumping more cash into the economy — and await the outcome of this week’s crucial EU summit on trying to avert a eurozone break-up.

“The committee seems to think that there is merit in holding on a bit to check that inflation has peaked, to assess the impact of the asset purchases so far and to see what comes out of this week’s meeting of eurozone leaders,” said Capital Economics analyst Vicky Redwood.

Although not a member of the eurozone, Britain, a member of the European Union, is a key trading partner of the single-currency area.

The BoE’s main interest rate has stood at 0.50 per cent since March 2009, when the bank also began injecting 200 billion into the economy under the policy known as quantitative easing (QE).

The Bank of England decided in October to increase the amount by 75 billion, as Britain’s economy struggles to recover from recession.

QE is a process whereby central banks create new cash that is used to purchase assets such as government and corporate bonds in the hope of giving a boost to lending and economic growth.

However, some analysts argue that quantitative easing — which is in effect printing money — stokes inflationary pressures. It is the technique being pressed upon the ECB to stop the eurozone debt crisis from worsening.

Despite recent falls, British inflation remains stubbornly high, driven largely by high energy costs. Official 12-month inflation fell to a rate of 5.0 per cent in October from a three-year high of 5.2 per cent in September.

The BoE’s key remit is to keep annual inflation close to a 2.0-per cent target.

The British economy, which clawed its way out of a vicious recession in the third quarter of 2009, is currently buckling under the pressure of the eurozone debt drama, state austerity measures and high inflation.

The government has forecast the British economy to grow by just 0.7 per cent next year, sharply down from an official estimate of 2.5 per cent given in March, and blamed the impact of the eurozone debacle.

British Finance Minister George Osborne, delivering more austerity measures last week, warned that the economy will enter a double-dip downturn if the eurozone slumps back into recession.

“Given the ongoing crisis in the eurozone and significant chance of recession there, it is likely to be a major challenge for the UK economy to avoid recession,” said economist Charles Davis at the Centre for Economics and Business Research consultancy.

“The UK recovery is strongly reliant on export growth as domestic demand remains weak due to falling household real incomes, cuts in public spending and private sector uncertainty holding back investment activity.

“With 50 per cent of UK goods exports heading to the eurozone, it would be incredibly hard for the UK to avoid a hit to real economic activity as output contracts on the continent,” he added.

The BoE added yesterday that it expected its current QE stimulus programme to take another two months to complete, adding that the scale of the asset purchases would be kept under review.

Analysts said they expected the BoE to provide more stimulus cash early in the new year.

“No action from the Bank of England this month, but more quantitative easing is clearly on the cards for early 2012,” said IHS Global Insight economist Howard Archer.

“We expect the QE trigger to be pulled again in February, with a 50-billion bullet loaded.”