The Bank of England kept its benchmark interest rate at a record low as signs the recovery is losing momentum kept a majority of policy makers focused on stimulating growth during the government’s fiscal squeeze.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the key rate at 0.5 percent, as forecast by all 43 economists in a Bloomberg News survey. The bank also left its bond-purchase program at 200 billion pounds ($330 billion), as forecast by 29 economists in a separate poll.
The economy stalled over the fourth and first quarters, and surveys this week showed services, manufacturing and construction growth moderated in April. Officials are split on whether the government’s spending cuts to reduce the budget deficit will be enough to tame an inflation rate that’s double the central bank’s 2 percent target.
“The economic data are sufficiently concerning for the MPC that they’re willing to sit on their hands for now and leave policy where it is,” Philip Rush, an economist at Nomura International Plc in London, said before the announcement. “That doesn’t prevent rate hikes from becoming appropriate soon. There are enough inflation pressures coming through that it seems hard to imagine they’ll wait much longer.”
The pound remained higher against the dollar after the announcement and was at $1.6504 as of 12:01 p.m., up 0.1 percent on the day. Bonds declined, with the yield on the 10-year gilt up 3 basis points at 3.41 percent.
The Frankfurt-based European Central Bank will probably keep its key rate at 1.25 percent today, according to all 48 economists in a Bloomberg poll, after it raised the rate in April. The bank announces the decision at 2:45 p.m. in Helsinki. The Federal Reserve last week retained its pledge to keep rates “exceptionally low” for an “extended period.”
Monetary policy elsewhere is becoming tighter. The Philippine and Malaysian central banks today increased interest rates, and India raised rates this week for the ninth time since March 2010. The cost of borrowing in China, Asia’s biggest economy, may rise further after its central bank said this week that taming inflation is its top priority.
U.K. policy makers made their decision today with new growth and inflation forecasts, which King will publish on May 11. Data last week showed the economy grew 0.5 percent in the first quarter, barely enough to erase a contraction in the previous three months. The recovery may be further restrained as the government cuts spending to narrow the budget deficit and household pay growth lags behind inflation.
The National Institute for Economic and Social Research today lowered its 2011 growth forecast to 1.4 percent from 1.5 percent in January, and raised its inflation projection to 4.5 percent from 3.8 percent. The group, whose clients include the central bank, sees inflation slowing to 1.9 percent in 2012.
“Sentiment and economic performance is being affected by concerns over austerity measures and cost inflation,” Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, said in a statement today. It also said the economy has been “subdued.”
Chancellor of the Exchequer George Osborne has vowed to stick to his plan to eliminate the bulk of the budget deficit by April 2015. The government chopped spending by 6 billion pounds in the year to March and will cut 310,000 public-sector jobs. Both parties in the coalition, which took office a year ago, are set to lose seats in local elections held today across England.
Households are under pressure from a surge in oil and other commodity prices. The pound’s 25 percent drop on a trade- weighted basis since the start of 2007 has fed price pressures by raising import costs.
The squeeze from the government’s fiscal plans is easing pressure on the bank to lift rates to counter inflation now, said Hetal Mehta, an economist at Daiwa Capital Markets Europe in London and a former U.K. Treasury official.
“If we weren’t seeing the fiscal tightening, they would have gone ahead and hiked,” she said. “Policy is in emergency mode and we’re not in the same crisis we were in two years ago, so they will want to normalize, but at a gradual pace.”
Demand in emerging markets is benefiting some companies. London-based Diageo Plc (DGE), the world’s largest distiller, said today sales rose 7 percent in the quarter through March, more than analysts estimated, as sales of Scotch whisky in Asia offset sluggish demand in Europe.
Minutes of today’s decision will be published on May 18. The report on April’s meeting showed Andrew Sentance, whose term finishes at the end of the month, maintained a call to raise the key rate a half point to 1 percent, while Martin Weale and Chief Economist Spencer Dale kept up a push for a quarter-point increase. The remaining officials, including King, voted for no change on the rate, as Adam Posen argued for a seventh month to expand the bond-purchase program.
Investors have pushed back bets on the first rate increase to December from expectations a month ago that the first move would come in July, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc.
“If the market’s not pricing in a rate increase, that gives the bank a bit of leeway,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “There’s a risk to their credibility, but that risk has receded in recent weeks as the activity data have faltered.”
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