By William L. Watts, MarketWatch
LONDON (MarketWatch) — The Bank of England left its key lending rate unchanged at a record low Thursday, as expected, but the decision may have been a close one as policy makers attempt to balance inflation pressures and uncertainty over the strength of the economic recovery.
The Monetary Policy Committee kept the key lending rate at 0.5%, where it has stood since March 2009. The central bank also made no changes to its 200 billion pound ($233.1 billion) program of asset purchases.
The British pound (GBPUSD 1.6139, -0.0060, -0.3704%) traded at $1.6150 versus the dollar, down 0.3%, extending an earlier loss. The broadly-weaker euro (EURGBP 0.8570, -0.0016, -0.1864%) traded at 85.67 pence, down 0.2%.
By William L. Watts, MarketWatch
LONDON (MarketWatch) — The Bank of England left its key lending rate unchanged at a record low Thursday, as expected, but the decision may have been a close one as policy makers attempt to balance inflation pressures and uncertainty over the strength of the economic recovery.
The Monetary Policy Committee kept the key lending rate at 0.5%, where it has stood since March 2009. The central bank also made no changes to its 200 billion pound ($233.1 billion) program of asset purchases.
The British pound (GBPUSD 1.6139, -0.0060, -0.3704%) traded at $1.6150 versus the dollar, down 0.3%, extending an earlier loss. The broadly-weaker euro (EURGBP 0.8570, -0.0016, -0.1864%) traded at 85.67 pence, down 0.2%.
Dale and Weale called for a quarter-point hike to 0.75%, while Sentance, who has pressed for monetary tightening since June, called for a half-point hike.
The remainder of the panel voted to leave rates unchanged in February, although the minutes showed a growing number of members were becoming worried about mounting inflation pressures.
The pound has lost ground versus the euro in recent weeks on rising speculation the European Central Bank will move to hike interest rates before the Bank of England, said Michael Hewson, strategist at CMC Markets.
Those expectations were boosted last Thursday, when ECB President Jean-Claude Trichet appeared to signal that the Frankfurt-based central bank would move to tighten monetary policy at its April meeting.
But concerns the move could have an adverse effect on the periphery of the euro zone have contributed to pressure on the euro in recent sessions, with the single currency slipping back toward trend-line support at 85.40 pence in recent action, Hewson said.
U.K. annual inflation hit 4% in January, double the bank’s medium-term target of 2%. Moreover, inflation has been above the target for 14 consecutive months.
Sentance and other critics have disputed the Bank of England’s central assertion that spare capacity will serve to bring inflation back to target over the next two years.
Rising oil prices were likely another source of fodder for rate-hike advocates, economists said. A roughly $15 a barrel jump in the price of crude over the last month obviously threatens to push inflation even higher in the near term, noted Vicky Redwood, an economist at Capital Economics.
But economists said ahead of Thursday’s decision that concerns a fragile recovery could weaken would be enough to keep the central bank on hold, particularly after gross domestic product unexpectedly contracted 0.6% on a quarterly basis in the final three months of 2010.
Subsequent economic data indicate the economy has bounced back in the first quarter. But with government austerity measures set to more fully kick in beginning next month, wavering MPC members will likely want to see first-quarter GDP data before making a move on rates, economists contend.
“We are aware that risks that the first rate hike might come much earlier than we are currently projecting [in the summer], particularly after the minutes of the February meeting showed a clear shift of the MPC towards the hawkish side,” said Chiara Corsa, an economist at UniCredit Bank.
“However, the growth outlook remains too uncertain at this stage, therefore the BOE is likely to err on the side of caution for a while,” she said.
