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Bank of England to sit tight over monetary policy: analysts

india Updated: Dec 09, 2009 07:14 IST

The Bank of England is expected to keep British interest rates at a record low level and maintain its credit-easing plans on Thursday after holding its last monetary policy meeting of 2009, analysts said.

The bank's nine-member monetary policy committee (MPC) will unveil its latest decision following a two-day meeting and after the British government outlines taxation and spending plans on Wednesday.

With Britain the only major economy still in recession, analysts widely predict the Bank of England to leave its key lending rate at an all-time low level of 0.50 percent -- where it has stood since March.

Also in March, the BoE began its extraordinary policy of pumping billions of pounds worth of newly-created money into the British economy as it struggled against the worst global downturn since the 1930s.

Britain's central bank had in November decided to pump out another 25 billion pounds (28 billion euros, 42 billion dollars) of cash in a renewed attempt to boost lending and lift Britain out of its record recession.

November's decision took the BoE's so-called quantitative easing (QE) programme to a total of 200 billion pounds, with the nation mired in its longest recession since records began in 1955.

"While the Bank of England appears to be keeping all of its options open, we suspect that the majority of MPC members would prefer not to increase QE again following November's extension unless the economy suffers a serious relapse," said Howard Archer, chief Britain economist at IHS Global Insight.

"In fact, we have a suspicion that the MPC will now sit tight for many months to come."

Although Britain has yet to follow the eurozone, France, Germany, Japan and the United States out of recession sparked by the global financial crisis, the country is forecast to have exited recession during the fourth quarter.

Official data due early next year will confirm whether this has indeed been the case.

Under QE meanwhile, the British central bank has purchased bonds from commercial institutions to try and boost lending to businesses and individuals which have seen funds dry up as a result of the credit crunch.

Minutes from the November gathering stated that the MPC would wait until February -- when it updates its inflation and growth forecasts -- before considering "the case for further changes" to the QE programme.

The minutes also showed that policymakers were split three ways on the amount of extra new money it should pump into the economy.

The decision to pump another 25 billion pounds was backed by seven of the nine policymakers -- including governor Mervyn King.

However, the central bank's chief economist had wanted it to create no extra money while another member voted for the amount to be increased by 40 billion pounds.

The British central bank's main task is to try and use monetary policy to keep annual British inflation close to a government-set target of 2.0 percent.

Twelve-month inflation rose for the first time in eight months in October, soaring to 1.5 percent as fuel prices fell less sharply compared with a year earlier, recent official data showed.

The BoE has however stressed that inflation is likely to fall back to about one percent in late 2010.

"It is very unlikely that we will see any change to monetary policy this month," said Capital Economics analyst Vicky Redwood.