UK: Monetary policy on hold despite jolt to recovery hopes

THE Bank of England refrained from unleashing further emergency support for the economy today, despite receiving a jolt over the health of the UK’s recovery.

The bank’s Monetary Policy Committee maintained interest rates at record lows of 0.5% and held its quantitative easing (QE) programme at �375billion as it continues to work through �50bn of asset purchases announced in July.

The move comes after positive manufacturing and services surveys revealed tentative signs of a recovery - but this optimism was dampened after the Organisation for Economic Co-operation and Development slashed its growth forecast for 2012.

The think-tank expects the UK will fail to pull out of its double-dip recession in the current quarter, which will see a 0.7% decline on an annualised rate, compared to previous expectations of a 0.5% decline.

Most economists have predicted a further QE boost in November, after the current run of asset purchases is completed, while some believe a rate cut is on the cards.


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Anna Leach, CBI head of economic analysis, said: “We would need only a relatively small deterioration in economic conditions to prompt a further extension of the asset purchase programme later this year.”

The bank currently expects the rate of inflation, which increased to 2.6% in July, to fall to the Government’s 2% target by the end of this year.

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Governor Sir Mervyn King and his colleagues will also want more time to assess the impact of the UK’s �80 billion “funding for lending” scheme, which was launched in the summer with the aim of unclogging the flow of credit.

The committee has also considered cutting rates below the current level of 0.5%, a move that once seemed improbable, although the bank continues to favour QE as its economic weapon of choice.

Today’s meeting was the first for former CBI chief economic adviser Ian McCafferty, who has replaced Adam Posen.

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