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Britain set for sixth year of record-low interest rate

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(Globalpost/GlobalPost)

The Bank of England is set to vote Thursday to keep its key interest rate at a record-low 0.50 percent, five years after slashing borrowing costs to the current level.

Analysts expect the BoE to hold tight, with the central bank not wishing to put the brakes on an economic recovery for Britain that has gathered speed over recent months.

"The Bank of England will undoubtedly leave interest rates unchanged at 0.50 percent at the March meeting of the Monetary Policy Committee," said Howard Archer, chief European economist at research group IHS Global Insight.

"The message repeatedly coming from the Bank of England is that while it is encouraged by the economy's recent strong performance, the Bank is not taking sustained recovery for granted."

Martin Weale, a member of the central bank's nine-strong Monetary Policy Committee (MPC), indicated last month that the BoE's main interest rate could begin rising next year before Britain's general election that is due in May 2015.

The central bank's key rate has stood at 0.50 percent since March 2009, when it also launched a so-called quantitative easing stimulus programme to help Britain to recover from the global financial crisis.

The BoE is on Thursday expected also to maintain the level of its £375-billion ($625-billion, 455-billion-euro) QE programme.

Bank Governor Mark Carney took the helm at the BoE last August and launched a forward guidance policy, under which he said borrowing costs would not be lifted until the British unemployment rate falls to at least 7.0 percent.

But after unemployment fell faster than expected to just above the 7.0-percent level, he recently delivered amended guidance. This states that the BoE will seek to absorb all the spare capacity in the economy as it looks to keep inflation close to a government-set target of 2.0 percent, before moving to hike its key lending rate.

"Rather than focusing on the UK unemployment rate, the Bank's revised forward guidance throws the net wider over a far larger pool of economic indicators," said Jane Foley, senior foreign exchange strategist at Rabobank.

"However, the Bank's central message is that there is still a significant amount of spare capacity in the UK economy... Even when the Bank rate does eventually rise, the MPC expects that the pace of policy tightening will be slow."

Since its February meeting, the Bank of England has ramped up its economic growth forecasts for Britain.

Gross domestic product (GDP) is set to grow by 3.4 percent this year, the central bank said in its latest quarterly report. That is up sharply from an earlier estimate of 2.8 percent.

The British economy expanded at the fastest annual rate last year since before the 2008 global financial crisis, growing by 1.9 percent.

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http://www.globalpost.com/dispatch/news/afp/140305/britain-set-sixth-year-record-low-interest-rate