Bank of England keeps rates steady in political uncertainty
By Jane Wardell |
May 11, 2010, Tuesday
|
Print Edition
Print Edition
THE Bank of England kept interest rates steady at 0.5 percent and refrained from any further asset purchases yesterday as it sought to provide markets with some stability amid ongoing uncertainty about the British general election.
As party leaders jostled for power after last week's national poll resulted in a hung parliament, in which no single party holds a majority, the central bank decided against doing anything to rock the boat further.
Economists said the outcome was anticipated regardless of the inconclusive election because of concerns that Britain's recovery from recession remains in the early stages.
"The Monetary Policy Committee unsurprisingly judged that now is not the time to be raising interest rates as the downside risks to still fragile UK economic recovery are magnified by current major political uncertainty and the recent heightened market turmoil resulting from the Greek crisis and contagion effects on other eurozone countries," said IHS Global Insight economist Howard Archer.
British interest rates have been at a record low for more than a year and the bank completed a 200 billion pound (US$300 billion) quantitative easing program - purchasing assets to boost the money supply - in January.
The next big sign post on the economy will come tomorrow when the bank releases its quarterly Inflation Report.
Recent data has shown inflation rising stronger than anticipated - consumer price inflation hit 3.4 percent in March, well above the bank's 2 percent target - a factor that would usually prompt a tightening of rates to rein in spending.
But most economists suggest that the weakness of the economy is likely to bring inflation back down to target in the coming months, meaning rates may stay on hold into next year.
"We do not expect any monetary policy tightening until early 2011, when the economy will be in better shape," said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club economic consultancy. "The pace of tightening thereafter will be very much dependent upon who forms the next government and how aggressive a program of fiscal consolidation they implement."
Britain's election last Thursday produced a hung Parliament in which no party holds a majority of seats. That has left the Conservatives and Labour scrambling to win the favor of the Liberal Democrats to give them a coalition majority.
As party leaders jostled for power after last week's national poll resulted in a hung parliament, in which no single party holds a majority, the central bank decided against doing anything to rock the boat further.
Economists said the outcome was anticipated regardless of the inconclusive election because of concerns that Britain's recovery from recession remains in the early stages.
"The Monetary Policy Committee unsurprisingly judged that now is not the time to be raising interest rates as the downside risks to still fragile UK economic recovery are magnified by current major political uncertainty and the recent heightened market turmoil resulting from the Greek crisis and contagion effects on other eurozone countries," said IHS Global Insight economist Howard Archer.
British interest rates have been at a record low for more than a year and the bank completed a 200 billion pound (US$300 billion) quantitative easing program - purchasing assets to boost the money supply - in January.
The next big sign post on the economy will come tomorrow when the bank releases its quarterly Inflation Report.
Recent data has shown inflation rising stronger than anticipated - consumer price inflation hit 3.4 percent in March, well above the bank's 2 percent target - a factor that would usually prompt a tightening of rates to rein in spending.
But most economists suggest that the weakness of the economy is likely to bring inflation back down to target in the coming months, meaning rates may stay on hold into next year.
"We do not expect any monetary policy tightening until early 2011, when the economy will be in better shape," said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club economic consultancy. "The pace of tightening thereafter will be very much dependent upon who forms the next government and how aggressive a program of fiscal consolidation they implement."
Britain's election last Thursday produced a hung Parliament in which no party holds a majority of seats. That has left the Conservatives and Labour scrambling to win the favor of the Liberal Democrats to give them a coalition majority.
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