Bank Of England Keeps Rate Policy Unchanged

Published January 12, 2012 12:36PM (EST)

LONDON (AP) — The Bank of England kept its monetary policy unchanged Thursday despite mounting concerns over the state of the British economy.

Following the conclusion of its two-day rate-setting meeting, the Bank said it was maintaining its main interest rate at the record low of 0.5 percent together with the current level of its monetary stimulus.

The decisions were widely anticipated and no explanatory statement was provided.

Many analysts think the Bank's nine-member rate-setting Monetary Policy Committee will decide to increase the level of asset purchases it is making from the current level 275 billion pounds ($422 billion), possibly as soon as next month when it will be armed with its latest quarterly economic projections. The Bank expects to conclude its current program of asset purchases, known as quantitative easing, or QE, by early next month.

"Next month should see the Committee announce a further round of QE, which we think will take it further towards eventually increasing the program to some 500 billion pounds," said Vicky Redwood, chief U.K. economist at Capital Economics.

The Bank backed another round of asset purchases in October — it halted the program in January 2010 — even though inflation was running at 5 percent, more than double its 2 percent target. They justified the move on the faltering economy and expectations that inflation would fall back sharply this year.

Under the program, the Bank creates money electronically to buy high quality assets, mainly government bonds. The intention is to reduce the cost of borrowing and get more money flowing in credit markets to support investment and stimulate demand.

Earlier Thursday, further evidence emerged of the parlous state of the British economy, with Tesco PLC, the country's biggest retailer by sales, reporting a surprisingly big slump in sales over the crucial Christmas trading period.

The fortunes of the British economy, which has largely flatlined over the past year, could well hinge largely on how the 17 countries that use the euro zone deal with their debt crisis. Europe remains Britain's main export market so an improvement in sentiment there could help shore up the British economy.

There were some tentative signs Thursday that investors may be getting more confident over the ability of European policymakers to finally get a grip on the crisis, which has raged for the best part of two years now. Spain raised more money than it was planning to and also at a fairly low rate.

"The outlook for the region remains highly uncertain and the direction of U.K. monetary policy will probably be guided more by the situation in the single currency area than anything else," said Chris Williamson, an analyst at financial information company Markit.

Minutes of the rate-setting meeting, which usually give an insight to the committee's decision-making, will be made available on Jan. 25.

By Salon Staff

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