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Bank of England leaves interest rate, stimulus on hold

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(Globalpost/GlobalPost)

The Bank of England on Thursday voted at a regular policy meeting to hold its reference interest rate at a record-low 0.50 percent, where it has stood for four years, and opted against increasing its cash stimulus programme to boost a British economy on the brink of recession.

"The Bank of England’s Monetary Policy Committee today voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent," the BoE said in a statement following a two-day gathering.

"The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion" ($589 billion, 434 billion euros).

Analysts had said the decision over stimulus, or quantitative easing (QE), had been on a knife-edge with Britain at risk of its third recession since 2009.

Minutes of the latest meeting, explaining the reasons behind the BoE's latest monthly policy decisions, are to be published on March 20, the central bank said.

Soon after the BoE announcement, the European Central Bank said it had decided to leave its main refinancing rate at a historic low of 0.75 percent, despite concerns that political gridlock in Italy could trigger a resurgence in the debt crisis.

ECB watchers had not expected the central bank to ease borrowing costs in the euro area this month, but analysts said they would listen to hear whether central bank chief Mario Draghi had anything to say about the political situation in Italy and the possible repercussions for the euro area as a whole.

Britain is not a member of the eurozone but relies heavily on the bloc for its day-to-day trading of goods and services.

Recent official data showed that British gross domestic product (GDP) shrank by 0.3 percent in the fourth quarter of 2012 compared with the previous three months. Another contraction in the current first quarter of 2013 would officially place Britain in a rare "triple-dip" recession.

Against this backdrop, Moody's ratings agency last month lowered its top-level AAA credit rating for Britain. Moody's downgraded Britain by one notch to Aa1, arguing that government debt was still mounting and that growth was too weak to reverse the trend before 2016.

The downgrade, along with expectations of more stimulus, have been weighing on the British pound in recent weeks, but sterling rose against its main rivals following Thursday's decision.

"The Bank of England today kept quantitative easing levels on hold... giving the pound sterling a timely boost," said Joshua Raymond, chief market strategist at City Index trading group.

"The move by the MPC was no doubt helped by the much stronger than expected UK services data earlier this week, which accounts for two-thirds of the UK economy and rose at its fastest pace in five months."

Minutes of the central bank's meeting in February showed that its outgoing governor Mervyn King unsuccessfully advocated for £25 billion worth of more stimulus.

But in the end the BoE's nine-member Monetary Policy Committee voted 6-3 to keep its QE cash stimulus level on hold.

Under quantitative easing, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds with the aim of boosting lending and in turn economic activity.

QE can stoke inflation however as it is tantamount to printing money.

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http://www.globalpost.com/dispatch/news/afp/130307/bank-england-leaves-interest-rate-stimulus-hold-0