Economic News

LONDON (ShareCast) - The Bank of England voted unanimously in favour of keeping interest rates at 0.5% in July and the programme of quantitative easing (QE) at £125bn.

Minutes from this month's Monetary Policy Committee meeting revealed the nine-members expect the economy to shrink less in the second quarter than they thought back in May.

The UK economy contracted 2.4% during the first three months of 2009, but experts think Friday's figures will show GDP fell just 0.3% in the second quarter.

A key issue for rate setters was how sustainable the apparent turnaround in activity is likely to be.

"Little evidence had emerged since May to change the Committee's views about the broad shape of the prospects for the economy in the medium term, although the downside risks to GDP in the near term had probably diminished," it said.

The central bank admits inflation may be a little higher than previously forecast near term, although serious concerns remain that the ongoing need for financial institutions, households and companies to adjust their balance sheets could stifle economic activity.

It added that there was not enough "clear evidence" to suggest an increase to the QE programme was necessary, and that purchases would continue in the month ahead as they were still short of the £125bn target.

The MPC will keep the scale of the programme under review and have a good look at the August Inflation Report available at next month's meeting.

IHS Global Insight economist Howard Archer thinks interest rates will stay at historic lows "deep into 2010", but that the Bank may be nearing the end of QE.

"We suspect that the MPC (A050540.KQ - news) are more likely than not to use the final £25bn that they are currently authorized by the Chancellor to spend, but this will be it unless the economy takes a major renewed downward lurch or bank lending does not pick up appreciably over the coming months," Archer said.