Friday July 3, 03:07 PM
What the Bank of England has to weigh up next week
LONDON, July 3 (Reuters) - The Bank of England looks certain to keep interest rates at a record low of 0.5 percent next Thursday as it continues to try to lift the economy out of recession, so most attention will focus on whether it expands its
quantitative easing target.
The BoE has already created money to buy more than 100 billion pounds of assets, mainly gilts, and is on track to hit its 125 billion pound target by the end of the month.
Most economists expect the scheme will be extended to 150 billion pounds, the limit authorised by the government earlier this year. But they are split on whether the BoE will take this step this month, or wait until August when it publishes new quarterly forecasts.
Here are some points likely to feature in the Monetary Policy Committee's decisions.
DEPTH OF RECESSION
Britain's economy contracted by a larger than expected 2.4 percent in the first three months of this year, its sharpest quarterly fall since 1958.
Forward-looking indicators have painted a brighter picture. Consumer confidence has picked up, surveys suggest the service sector expanded in both May and June and even the housing market is stabilising.
The National Institute of Economic and Social Research calculates the economy returned to growth in April, reinforcing the view that Britain will be one of the first major economies to emerge from recession.
Bank of England policymakers, however, have warned that the recovery could be fragile and an inventory-led pick-up may not be sustained if bank lending is too weak to support demand.
INFLATION
Inflation remains above the Bank of England's 2 percent target and has proved surprisingly sticky, largely because the pound's fall over the past two years has pushed up import prices.
Consumer price inflation moderated to 2.2 percent in May and retail price inflation -- a broader measure which includes more housing costs -- has turned negative.
Most economists expect both measures of inflation to fall further in the coming months as the recession erodes pricing power, and the BoE's May inflation report concluded there was a good chance it would undershoot the target in two years' time.
Nevertheless, a near-doubling in oil prices since the start of the year means the threat of deflation has largely gone.
CREDIT CONDITIONS
The Bank of England's latest credit conditions survey suggested government initiatives to boost lending had enjoyed some success.
Secured credit to households increased in the second quarter for the first time since the third quarter of 2007 and conditions looked set to loosen further in the next few months.
BoE policymakers appear to be happy with the way QE is progressing, but there is limited hard evidence that the extra funds being pumped into the system are finding their way to households and businesses.
ASSET PRICES
Equity prices have moved sideways over the past few weeks after a strong rally since March.
House prices appear to be stabilising after shedding around 20 percent from their 2007 peaks.
Figures from the Nationwide Building Society show house price rose for a second month running in June, leaving them less than 10 percent down on a year ago.
STERLING
The pound has risen on the foreign exchanges over the past three months, having lost a quarter of its value in trade-weighted terms since mid-2007.
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(Reporting by Christina Fincher; Editing by Toby Chopra) Keywords: BRITAIN BOE/RATES
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