Bank of England set to keep record low interest rate

Thursday, 9 June 2011 00:00 - - {{hitsCtrl.values.hits}}

LONDON, (AFP) - The Bank of England is widely expected to keep its key interest rate at a record low 0.50 percent on Thursday as Britain struggles to mount a recovery from recession, analysts said.

However, high inflation could see the BoE hike borrowing costs later this year, mirroring steps already taken by the European Central Bank to tighten monetary policy in the wake of rising prices across the eurozone.

“There is little chance of an interest rate rise” on Thursday at the end of a two-day meeting, said Vicky Redwood, senior UK economist at research group Capital Economics.

“The latest economic data certainly have not provided any reason for an immediate interest rate rise,” she added.

The British economy expanded by 0.5 percent in the first three months of 2011 but this only made up for a contraction of 0.5 percent in the final quarter of 2010, when the economy was hit hard by severe winter weather.

Britain pulled out of a record-length recession in late 2009 but the recovery has faltered amid deep cuts to state spending, tax hikes and soaring inflation.

The International Monetary Fund on Monday backed the government’s policy of cutting public spending to slash a massive deficit, despite domestic calls for the pace of cuts to be slowed because the economic recovery has faltered.

Ahead of Thursday’s meeting, the BoE’s chief economist warned that Britain faced a “bleak time” over the next two years due to low economic growth and high prices.

Spencer Dale also admitted that he could not be sure about how soon interest rates would rise or by how much.

“I am worried about growth remaining feeble and I am also worried about inflation remaining high -- and if you like, that’s the dilemma facing the MPC (monetary policy committee) at the moment -- trying to balance these two very significant risks,” he told the BBC recently.

Inflation soared to 4.5 percent in April, hitting a two-and-a-half-year high and stoking the prospect of an interest rate hike some time soon. The BoE’s target inflation rate is just 2.0 percent.

The BoE slashed interest rates to 0.50 percent more than two years ago, in March 2009, when it also launched a radical quantitative easing (QE) programme to help drag Britain out of a deep recession.

Under QE, the bank has created some 200 billion (224 billion euros, $329 billion) of new money by purchasing government bonds and high-quality private sector assets so as to give the economy an added boost.

On Thursday meanwhile, the European Central Bank is set to signal a rate hike as market tensions ease following an EU, ECB and International Monetary Fund accord to provide another tranche of bailout funds to indebted Greece.

Economists are waiting for ECB president Jean-Claude Trichet to say that the bank’s position on inflation is now one of “vigilance,” a code word tipping markets to an interest rate hike the following month.

Some forecast the current benchmark rate of 1.25 percent could reach 2.0 percent by the end of the year although the ECB might tread slowly to avoid undermining weakened eurozone countries like Greece, Ireland and Portugal, all three of whom have needed bailouts.