Thursday October 8, 09:53 AM
Bank of England forecast to hold interest rates
By Roland Jackson
LONDON (AFP) - The Bank of England is forecast to hold its key lending rate at a record low 0.5 percent and maintain its credit-easing plans when it meets on Thursday, analysts said.
The central bank's rate-setting monetary policy committee (MPC (A050540.KQ - news) ) will kick of its two-day meeting on Wednesday against the backdrop of recent encouraging signs that Britain is emerging from a deep recession.
The BoE had voted in September to freeze interest rates at 0.5 percent and continue its quantitative easing (QE) programme to pump out 175 billion pounds (194 billion euros, 287 billion dollars) of new money.
"The MPC is likely to keep the overall stance of policy on hold at its meeting on Thursday -- specifically we expect the bank rate to be held at 0.5 percent and the QE target to remain at 175 billion pounds," said Investec Securities economist Philip Shaw.
Under QE, the BoE creates money by buying bonds from commercial institutions in the hope of boosting lending in the economy.
The British central bank in March slashed borrowing costs to the current record low and embarked on a radical QE policy in an attempt to lift Britain out of recession.
Britain's economy shrank by 0.6 percent in the second quarter compared with activity in the first three months of 2009, which was better than the previous estimate of minus 0.7 percent, data showed last week, sparking recovery hopes.
That was the second upgrade to the forecast since July -- but it was still the fifth quarterly contraction in a row amid soaring unemployment levels.
"Recent news reinforces our view that third-quarter gross domestic product (GDP) figures will show the first growth for a year and a half," Shaw added.
"Against this background and with recent (inflation) figures disappointing, we judge that the MPC will not expand QE next month either."
British 12-month inflation had slowed to 1.6 percent in August, the lowest level since 2005, owing to lower food prices and unchanged energy bills, official data showed last month.
The annual reading for August was the weakest since January 2005 as food prices fell sharply.
The BoE's main task is to try and use monetary policy to keep annual British inflation close to a government-set target of 2.0 percent.
Other data released this week suggested that the economy was partly on the mend at last.
Home prices in Britain rose 1.6 percent in September from August, marking the third monthly gain in a row, a survey from home-loans provider Halifax showed on Tuesday.
Sales of new cars in Britain leapt 11.4 percent in September, compared with the same month of 2008, thanks to a government-backed scrapping scheme, industry body the Society of Motor Manufacturers and Traders also revealed.
On the downside, British manufacturing output fell unexpectedly by 1.9 percent in August from July, according to data which dampened hopes of a speedy economic recovery. Output on a 12-month basis sank 11.3 percent.
A wider measure of industrial production, which includes mining, quarrying and energy, fell 2.5 percent in August from July and was down 11.2 percent year-on-year.
"The sharp drop in industrial production in August is likely to reinforce the Bank of England's concern over the strength and sustainability of any recovery," said IHS Global Insight economist Howard Archer.
"Consequently, the data reinforce belief that interest rates will remain down at 0.50 percent not only on Thursday but deep into 2010 and very possibly beyond."
And he added: "It also raises the prospect that the Bank of England could further raise the amount being spent on quantitative easing."
Britain, like the United States, has yet to join other major economies France, Germany and Japan that have pulled out of recession after the worst global downturn since the 1930s.
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