Bank to keep rates at record lows amid recovery doubts

Published 09th Sep 2010

The Bank of England looks set to keep interest rates at a record low on Thursday -- and probably well into next year -- to keep the recovery on track in the face of austerity measures and a weakening U.S. economy.

Despite above-target inflation, the central bank has taken a distinctly dovish stance and indicated it is just as likely to push harder on the monetary accelerator as it is to ease off.

In practice this would mean restarting its quantitative easing scheme and buying more assets with newly-created money.

"Given various jitters in the global economy, any move in the short term would be an expansion of quantitative easing, rather than an increase in rates," said Philip Shaw, chief economist at Investec.

All 60 economists in a Reuters poll reckon the central bank will keep borrowing costs at 0.5 percent for the 18th month running when the Monetary Policy Committee concludes its two-day meeting on Thursday, and most see no move up until the second quarter of 2011 at the earliest.

The economy grew a robust 1.2 percent in the three months to June, but private sector surveys are pointing to a slowdown to less than half this rate in the third quarter.

Looming government spending cuts have knocked confidence even before they have taken effect. House prices have stalled since the start of the year and firms have become more cautious about taking on new workers.

DOWNSIDE RISKS

The government hopes the manufacturing sector may be able to take up the slack from a public spending cuts, but this is likely to be hard when trading partners are facing an equally uncertain recovery.

Fears over the health of the U.S. economy in particular led to sharp falls in equity markets in August and a drop in government bond yields to a record low.

Banks' heavy refinancing needs have also led to worries about the supply of credit, and industry bodies have urged the BoE to keep monetary stimulus in place until the recovery is assured.

"British business will find it very difficult to drive the recovery without a prolonged period of low interest rates," said David Kern, chief economist at the British Chambers of Commerce. "Any consideration of raising interest rates should be dismissed until the middle of 2011 at the earliest."

With the exception of Andrew Sentance -- who for the last three months has voted to raise interest rates because of his concerns about above-target inflation -- BoE policymakers appear sympathetic to the BCC's view.

BoE Deputy Governor Charlie Bean said last month that policymakers in advanced economies may still need to provide further support to prop a fragile global recovery.

The central bank's quarterly forecasts last month have left the door open for more monetary easing, envisaging a lower growth outlook and inflation falling well below its 2 percent target in two years.

Source: ' Reuters '

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