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UK: Bank of England leaves monetary policy on hold

12:37 10 January 2013

The Bank of England in the City of London

The Bank of England in the City of London

BANK of England policymakers kept interest rates at emergency lows and held off from further economy-boosting measures today despite fears of a triple-dip recession.

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The bank’s Monetary Policy Committee (MPC) remained in “wait and see” mode again this month, holding rates at their record low of 0.5% and maintaining its quantitative easing (QE) programme at £375 billion.

Its decision comes amid mounting concerns that Britain’s economy slipped back into the red in the final quarter of 2012 following figures suggesting the dominant services sector contracted in December for the first time in two years.

The MPC is expected to hold off from any further QE action until the picture becomes clearer, although some economists believe dire economic news could see it push the button in the first half of the year.

Savers are also unlikely to be offered any respite from painfully low interest rates for the foreseeable future, with experts at investment banking giant Citi recently saying they believed rates would be held at historic lows until mid 2017.

Anna Leach, head of economic analysis at the CBI business group, said: “A change in monetary policy was unlikely this month, given that the UK economy continues to send out mixed signals.

“We’re not expecting any change in monetary policy over the next few months, unless compelling evidence of a renewed downturn emerges.”

The bank has held rates at 0.5% since March 2009 as the economy has struggled to recover from the financial crisis.

A gloomy report from Markit economists recently estimated UK gross domestic product (GDP) contracted by 0.2% in the final three months of 2012 in a marked reversal of the 0.9% recovery the previous three months.

With a very real risk that the first quarter of 2013 might not prove much better, the economy could be heading for two consecutive quarters of declining output which would mark an unprecedented triple-dip recession.

But there has been a glimmer of hope on the global economic outlook after America’s recent fiscal cliff deal to avoid automatic tax hikes and spending cuts, a recent easing in eurozone debt tensions and with cheer today after data showed a far stronger-than-expected trade performance by China last month.

The bank will also have to weigh up the encouraging early results of the Funding for Lending scheme to boost the flow of credit.

Mortgage approvals to home buyers climbed to a 10-month high in November, according to the Bank, while its recent credit conditions report showed that lenders expect to “significantly” increase the availability of finance to households and borrowers this year.

Inflation might continue to cause a headache for policymakers, however, after the consumer prices index leapt to 2.7% from 2.2% in September and amid signs it will pass 3% in the next few months as energy bill hikes take effect.

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