Bank of England holds fire over rates, stimulus

The Bank of England on Thursday kept its key interest rate at a record-low level and maintained the amount of cash stimulus being pumped around Britain's economy, as the country risks a return to recession.

The BoE's widely-expected announcement followed its first monetary policy meeting of the year and came shortly before the European Central Bank said it was keeping eurozone borrowing costs unchanged.

"The Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.50 percent," the BoE said, adding that its quantitative easing (QE) stimulus would remain at £375 billion ($602 billion, 459 billion euros).

The central bank's reasons behind the decisions were to be outlined in minutes of the latest regular two-day meeting due for release on January 23.

With Britain's economy likely to have contracted in the final quarter of last year, the Bank of England (BoE) is forecast to keep interest rates at 0.50 percent for some time but may soon decide to increase QE, according to analysts.

"The main question continues to relate to whether the committee will respond to signs of weakness in activity by sanctioning more QE," Investec bank economist Philip Shaw said on Thursday.

Following the 2008 global financial crisis, the BoE slashed its main lending rate to an all-time British low-point of 0.50 percent, where it has stood for almost four years.

Also since March 2009, the central bank has pumped £375 billion of new cash into the economy under its stimulus programme.

Under QE, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds from banks with the aim of increasing lending by retail banks and boost economic activity.

"The QE programme has now been on hold for almost three months, the longest period at which it has stood unchanged since October 2011," said Rob Harbron, an economist at the Centre for Economics and Business Research.

"But as the UK economy remains on a fragile footing there is justification for increasing the purchasing target again. An output contraction is expected for the final quarter of 2012 and there is a risk of this continuing into the first quarter of 2013" -- which would mean a triple-dip recession for Britain.

Britain sank into the first phase of a double-dip recession in 2008 as a result of the devastating global financial crisis that sparked a number of vast banking bailouts.

The economy rebounded in late 2009 but struggled to stage a convincing recovery and fell back into a second downturn in late 2011, which lasted for three quarters, as the eurozone crisis loomed large. Britain is not a member of the single currency bloc that is the country's main trading partner.

Activity in Britain has meanwhile been hit hard also by deficit-slashing austerity measures from the nation's Conservative-Liberal Democrat coalition government.

Latest official data showed that Britain's economy grew by 0.9 percent in the third quarter of 2012 -- although it was boosted by one-off factors, including the London 2012 Olympic Games and rebounding activity after an extra public holiday for Queen Elizabeth II's Diamond Jubilee.

The BoE will meanwhile be led by Canadian central bank chief Mark Carney from July. The British government in November named Carney as the new Bank of England governor, the first time a foreigner has been chosen to lead the institution.

Finance minister George Osborne described the 47-year-old as the "outstanding central banker of his generation." Carney will take over from Mervyn King, who has led the BoE since 2003 and is due to step down on June 30.

--

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