The Bank of England left the benchmark interest rate at a record low and kept up its plan to buy bonds with newly created money to pull the economy out of the worst recession in a generation.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, reiterated its plan to buy 125 billion pounds ($205 billion) of government and corporate bonds, as forecast by 37 of 40 economists in a Bloomberg News survey. Policy makers also kept the bank rate at 0.5 percent.
The Bank of England has now entered its fourth month of money-printing as officials assess mounting evidence that the slump is easing while the squeeze on credit persists. Reports this week have shown service industries grew for the first time in a year last month, manufacturing improved, consumer confidence increased, and house prices unexpectedly jumped.
“It will take time to see the extent to which the asset purchase plan is working,” said Simon Hayes, an economist at Barclays Plc in London and a former Bank of England official. “It will be at least another month until we hear about any further change in policy. The interest rate is going to be on hold for quite some time.”
The pound extended gains against the euro, rising 0.4 percent to 86.42 pence per euro as of 12:09 p.m. in London.
Today’s rate decision was predicted by all 62 economists in a Bloomberg News survey. The bank has now left the key rate at the lowest in its history for four months.
ECB Decision
The U.S. Federal Reserve kept its benchmark at a range of zero to 0.25 percent in April and the European Central Bank will today probably hold its rate at 1 percent, according to the median forecast of 54 economists. The ECB announces its decision at 1:45 p.m. in Frankfurt.
Doubt surrounding Chancellor of the Exchequer Alistair Darling’s future in charge of managing the economy has overshadowed today’s Bank of England decision. Four ministers have resigned from Prime Minister Gordon Brown’s Cabinet this week, calling into question his own survival.
“It’s an irony that Darling’s unlikely to be in place to see the recovery,” said David Tinsley, an economist at National Australia Bank in London and a former official at the Bank of England. “It’s a cruel world, but a government that pulls an economy through a recession can’t necessarily expect to win on that record.”
In a YouGov Plc poll that closed yesterday, Brown’s ruling Labour Party had support from 21 percent of voters, compared with 37 percent for David Cameron’s opposition Conservatives, and 19 percent for the Liberal Democrats.
Rising Confidence
Sentiment among consumers has still improved, rising to a six-month high on Nationwide Building Society’s confidence index released yesterday. Lloyds Banking Group Plc’s Halifax division said today that house prices rose 2.6 percent in May, the most since 2002, and Markit Economics’s indexes of services, manufacturing and construction all rose.
William Morrison Supermarkets Plc, the smallest of the four main U.K. food retailers, said today that first-quarter sales growth rose more than expected after winning market share with lower prices and revamped fresh-food aisles.
David Blanchflower, who left the rate-setting panel last week, said on June 1 that Britain must still brace itself for the shock of “big increases” in unemployment. Wincanton Plc, a U.K. transporter of goods for Tesco Plc and Germany’s ThyssenKrupp AG, said today it cut about 120 jobs as the company reported a 45 percent drop in full-year profit.
Panel Debate
While the bank’s decision last month was unanimous, some policy makers did favor spending the full authorized total of 150 billion pounds and the panel said it will seek permission to print even more money than the maximum if needed. Minutes of today’s decision will be published on June 17.
Bond yields have risen as investors demand higher returns to compensate for a surge in government borrowing, muting the impact of the bank’s purchases. The yield on the 10-year U.K. government bond was at 3.77 percent today, 9 basis points higher than on May 7, when the bank held its last meeting. It fell as low as 2.93 percent on March 13 following the bank’s announcement to start purchasing gilts.
The economy faces a “slow and protracted” recovery, King said on May 13 as he presented forecasts showing inflation may not reach the 2 percent goal within three years on the current spending plan. Deputy Governor Charles Bean also predicted in a May 22 speech that the supply of credit will “remain impaired for some while.”
In a Confederation of British Industry survey released this week, a net 20 percent of companies said access to finance worsened in the quarter through May. Manufacturers are still seeing increases in the cost of borrowing and no improvement in access to financing, the EEF lobby group said in a survey today.
“There are no green shoots with respect to the U.K. economy apart from services,” said James Shugg, an economist at Westpac Banking Corp. in London. “We’re getting to the point where policy has probably done as much as it’s going to do and you’ve got to let time sort it out.”
