BoE holds interest rates at 0.5%

The Bank of England kept its key interest rate at a record low today, as expected, and is likely to stay put for the rest of …

The Bank of England kept its key interest rate at a record low today, as expected, and is likely to stay put for the rest of the year as the economy struggles to gain momentum.

A stream of disappointing economic data had meant the no-change verdict was a foregone conclusion and there was no market reaction. Investors are not pricing in a UK rate hike until 2012.

"The decision for no change was a sure fire bet," said Lee Hopley of the Engineering Employers' Federation.

UK interest rates have stood at 0.5 per cent since March 2009, when a deep recession and the threat of deflation prompted central banks around the world to slash rates to record lows.

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Since then, inflation in Britain has soared to more than double the central bank's 2 per cent target, but the BoE has been reluctant to tighten monetary policy at a time when the economy is already feeling the pain of the government's fiscal tightening.

BoE Governor Mervyn King told lawmakers last month he would only raise rates "in the context of a much stronger economy with unemployment falling rather than rising." Joost Beaumont at ABN Amro said he expected the BoE to hold fire until February.

"By then most of this year's fiscal consolidation measures have been implemented, while at the same time the economy should have regained momentum," he said.

Surveys of manufacturing, construction and services this week suggest the economy expanded by just 0.3 per cent from April to June, after showing no growth at all over the previous six months.

And even though inflation looks set to climb to 5 per cent in the coming months, worries about persistently weak growth have even led some members of the Monetary Policy Committee to mull the case for additional asset purchases to pump money into the economy.

In June, two of the BoE's nine policymakers voted for a monetary tightening, one for more stimulus and the remaining six for the status quo. A breakdown of today's vote will be published in two weeks' time.

Reuters