Wednesday June 3, 06:37 AM
Bank of England set to put rates on ice
By Roland Jackson
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LONDON (AFP) - The Bank of England was forecast to keep interest rates at a record low 0.50 percent on Thursday amid a deep recession, and assess whether to extend its costly credit-easing plan.
The BoE's rate-setting Monetary Policy Committee (MPC (A050540.KQ - news) ) begins its crucial two-day gathering on Wednesday amid recent news that the British economy shrank at its sharpest pace in almost three decades in the first three months of 2009.
The European Central Bank was also set to hold its key lending rate at 1.0 percent on Thursday, as the ECB explores new ways to get money flowing again in the recession-blighted eurozone.
"The BoE and the ECB are expected to leave interest rates on hold at their monthly meetings on Thursday," said economist Trevor Williams at Lloyds TSB Corporate Markets, a division of Lloyds Banking Group (LSE: LLOY.L - news) .
"We expect neither of the two banks to make changes to previously-announced non-standard credit easing measures," he added.
The British central bank decided to pump out another 50 billion pounds (83 billion dollars, 58 billion euros) of new money last month, when it had kept rates at the all-time low of 0.50 percent.
In total, the BoE has now injected 125 billion pounds in total in its so-called quantitative easing (QE) initiative.
Under QE, the central bank buys government bonds from commercial banks in the hope of kick-starting lending from commercial institutions.
"Having eased at May's meeting, we feel that the MPC will keep policy on hold and maintain the Bank rate at 0.50 percent and the QE target at 125 billion pounds," said economist Philip Shaw at Investec Securities.
Shaw added that the MPC may instruct BoE governor Mervyn King to ask formal permission from the British government to increase the QE target later this year.
"The BoE is set to complete its 125-billion-pounds of QE purchases by mid-to-late July. Hence if it is going to sanction more QE, it might make sense not to wait until August, in order to maintain some continuity," Shaw said.
"We judge that the MPC may use the forthcoming meeting to ask the governor to request a higher QE limit."
The global financial crisis and international credit crunch, which began in late 2007, sparked a stubborn global downturn. As a result, Britain was dragged into painful recession in the second half of 2008.
British gross domestic product (GDP) shrank 1.9 percent during the first quarter of 2009 compared with the final three months of last year, according to official data published last month.
In March, the BoE cut its key "repo" interest rate -- at which it lends to commercial institutions -- to a historic low of 0.5 percent where it has languished ever since. At the same time the bank embarked on its QE programme.
The BoE, facing a recession and tumbling inflation in Britain, has slashed borrowing costs from a rate of 5.0 percent last October to 0.5 percent, which is the lowest level since formation of the central bank in 1694.
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