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September 24, 2009

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BOE warns of false economic signs

BRITAIN'S economy may be emerging from recession, but with bank lending still weak and unemployment rising "there could be false dawns," the Bank of England said yesterday, citing the minutes to a meeting earlier this month.

Increases in house and stock market prices and improved economic confidence could "mark the start of a virtuous upward spiral for the economy," the rate-setters said at their September 10 policy meeting.

At that meeting, they unanimously left interest rates at a record low of 0.5 percent and decided to continue a program boosting money supply.

But while the short-term prospects had improved - the economy may have emerged from recession in the third quarter - it was still too early to predict a full recovery in the medium term, the bank said.

So even as all nine officials on the Monetary Policy Committee agreed not to expand the money supply program - dubbed quantitative easing - any further in September, they did not rule out a future increase.

The quantitative easing program, in which the central bank buys assets from banks to flush the system with cash, was increased in August by 50 billion pounds (US$82.14 billion) to 175 billion pounds.

Analysts said the Bank of England was now in a "wait-and-see" mode to gauge how strong a recovery would be, but that it may yet boost its quantitative easing program if lending did not pick up faster.

"A further loosening still looks possible later this year," said Vicky Redwood, an economist at Capital Economics.

She noted there was not any talk about cutting deposit rates - the rates banks get on the money they leave with the Bank of England.


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