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UK: MPC leaves monetary policy on hold

12:07 06 December 2012

The Bank of England

The Bank of England

BANK of England policymakers held back from prescribing further emergency medicine to the economy today despite gloomy signs that the recovery is stalling.

The bank’s Monetary Policy Committee (MPC) kept interest rates at their record low of 0.5% and held its quantitative easing (QE) stock at £375billion.

The announcement came as official figures revealed the country’s trade deficit - the gap between goods imported and exported - widened markedly.

It also follows George Osborne’s gloomy Autumn Statement, in which the Chancellor extended the age of austerity against a backdrop of weaker growth and a wider deficit.

Combined with weak surveys on the services, manufacturing and construction sectors, economists still expect the bank to unleash further QE in the new year.

But the economy returned to growth in the third quarter when gross domestic product (GDP) rose 1%, ending the longest double-dip recession since the 1950s.

A second estimate from the Office for National Statistics (ONS) confirmed the performance and revealed the strongest rise in household spending in more than two years in the period.

And there are also doubts among some MPC members over the possible impact, or lack of, of more QE.

In today’s trade figures, the overall deficit in goods and services rose from £2.5 billion to £3.6 billion in October, driven by a 1% fall in exports and 2.5% rise in imports.

The widening in the trade deficit was split roughly evenly between EU and non-EU countries.

Meanwhile, the deficit in goods in the three months to October widened to £28 billion, its highest level since records began.

The Office for Budget Responsibility (OBR) slashed growth forecasts for the next five years yesterday and predicted a borrowing bill some £84 billion higher than its last estimate.

Earlier this month, the minutes of the November MPC meeting appeared to keep open the possibility that the Bank will push the QE button again, should the economy disappoint further.

The underlying picture of the economy remains bleak with a disappointing series of surveys on the services, construction and manufacturing sectors.

Bank governor Sir Mervyn King said the economy could shrink again in the fourth quarter and the OBR agrees.

The MPC also revisited the case for lowering interest rates from 0.5% to 0.25% at its November meeting but decided this was unlikely for the time being.

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