Bank of England holds key rate steady at 0.5 pct

LONDON — The Bank of England kept its key interest rate at a record low of 0.5 percent on Thursday amid sluggish economic growth and a surprise drop in the inflation rate.

The decision by the bank's Monetary Policy Committee — which also left unchanged its asset purchase program, a financial stimulus measure — had been widely expected by markets.

"It was no surprise that the MPC decided to leave rates on hold today," said Fionnuala Earley, UK Consumer Economist at the Royal Bank of Scotland.

"With stagnant GDP, slower inflation in March and austerity measures now beginning to bite, we expect the MPC to wait at least until August before its first move — even though inflation is running at twice its target," she added.

The British central bank has in recent months been torn between concerns about high inflation and attempts to stimulate recovery from a deep recession.

But consumer price inflation unexpectedly fell back to 4 percent in March from 4.4 percent in February, while gross domestic product rose just 0.5 percent in the first quarter of the year — leaving it broadly unchanged over six months after a 0.5 percent contraction in the final quarter of last year.

The bank's aim is to hold the annual rise in the consumer price index to 2 percent, plus or minus one percentage point, a target which has been exceeded for 15 straight months.

Economists had started to factor rises in their forecasts for the coming months amid surging inflation, believing the bank would need to act to rein in price expectations despite sluggish growth and harsh government spending cuts.

Ian McCafferty, Chief Economic Adviser to the Confederation of British Industry, said that remained the likely scenario despite the fall in price pressures in March.

"Pipeline inflationary pressures have intensified, with our economic surveys showing rapid cost inflation from increased energy and commodity prices," McCafferty said. "Our view remains that the bank is likely to move away from the emergency 0.5 percent rate later this year."

Rates have been at that record low since March 2009 after a series of cuts in the wake of the global financial crisis. The bank also undertook a 200 billion pound asset purchase program to boost the money supply — so-called quantitative easing — after running out of room to maneouvre on rates.

Economists will now look to the release of the minutes of this month's meeting, due for release on May 18, for further clues about when a rate rise is likely.

The nine-member Monetary Policy Committee has been split three ways in recent months.

This was the last month for the committee's arch-hawk Andrew Sentance to win favor for a significant rate hike. Sentance, who has served on the committee since 2006, completes his term this month and is being replaced by Goldman Sachs Inc. senior economist Ben Broadbent on June 1.

Sentance has in recent months voted to raise rates to 1 percent to counter inflation. Two other committee members, Spencer Dale and Martin Weale, have for the past two months backed a hike to 0.75 percent.

Yet another member, Adam Posen, has instead voted to pump another 50 billion ($80 billion) into the bank's quantitative easing program to boost economic growth.

More speculation about rates will come next week when Bank Governor Mervyn King provides growth and inflation forecasts in the bank's quarterly inflation report.