UK: No change in monetary policy expected as Sir Mervyn King chairs his final MPC meeting

Sir Mervyn King, who will chair his final monetary policy committee meeting day before standing down

Sir Mervyn King, who will chair his final monetary policy committee meeting day before standing down as Bank of England governor next month - Credit: PA

Outgoing Bank of England governor Sir Mervyn King will call time on 16 years of rate-setting today when he chairs his final meeting on UK monetary policy.

Blossoming signs of economic recovery are widely expected to see policymakers vote against topping up the bank’s £375billion quantitative easing (QE) programme ahead of Sir Mervyn’s departure later this month.

A trio of upbeat surveys from manufacturing, construction and services have raised hopes over Britain’s recovery in recent days, which economists believe will see the Bank hold fire once more on pumping more cash into the economy.

The governor has been among a minority of MPC members calling unsuccessfully for another £25bn of QE at recent meetings.

But Sir Mervyn, who presided over the Bank’s first interest rate vote in June 1997, hands over to incoming governor Mark Carney next month with the economy on the road to ‘’gentle recovery’’.

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Sir Mervyn gave his most upbeat signal yet over the UK’s recovery from the financial crisis on presenting the Bank’s recent inflation report, when he said growth will be a ‘’little stronger’’ than previously hoped.

The economy is predicted to expand by 0.5% in the second quarter of this year, up from 0.3% in the first quarter, marking the Bank’s first growth upgrade since the financial crisis.

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Optimism has grown after a survey showed Britain’s dominant services sector in surged in May, while activity in construction and manufacturing also increased - reversing a trend which has seen them weigh on the economy during the downturn.

ING Bank economist James Knightley said the flurry of upbeat surveys mean there is “little prospect of any Bank action tomorrow and it diminishes the likelihood of any shift in policy under Mark Carney in the next few months”.

Martin Beck, economist at Capital Economics, said: “A question mark remains over how easy it will be to sustain growth in the face of significant headwinds.

“But evidence that the recovery may be establishing some momentum is becoming ever more convincing, as is the likelihood that the MPC will hold fire on more policy stimulus for the foreseeable future.”

The bank is also predicted to hold interest rates at their 0.5% record low at today’s 194th rates vote, but many economists still expect the bank to resume asset purchases “sooner or later” in the face of eurozone woes.

A purchasing managers’ survey yesterday showed eurozone business activity shrank at a slightly slower rate last month, but the economic bloc, Britain’s biggest trading partner, still remains a long way from recovery.

Sir Mervyn has described Europe’s struggles as the biggest threat to the UK recovery.

Weaker UK inflation will also give the Bank more scope to pump money into the economy, as fears over QE-induced price spikes recede.

Official data recently confirmed the first easing in the annual rate of price rises for six months, down to 2.4% in April and drawing nearer the bank’s 2% inflation target.

Chancellor George Osborne has also given the bank a looser remit on inflation, allowing it to tolerate longer periods of above-target inflation while pursing growth-boosting measures.

Economists expect the Bank to wait and see over more QE, before possibly resuming asset purchases in the third quarter.

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