Monetary Policy Committee leaves U.K. bank rate at record-low 0.5%
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The Bank of England, as expected, held its key lending rate unchanged on Thursday as fears about the economy’s ability to pull out of a slowdown in the face of austerity measures outweighed concerns about above-target inflation.
The central bank said its nine-member Monetary Policy Committee left the key lending rate at 0.5%, where it has stood since March 2009. Also as expected, the MPC voted to maintain its asset-purchase program at 200 billion pounds.
Meanwhile, the European Central Bank, which sets monetary policy for the 17-nation euro zone, is expected to announce its second rate hike in three months at 1:45 p.m. Frankfurt time, or 7:45 a.m. Eastern. The refi rate is expected to rise to 1.5% from 1.25%.
The monetary-policy decision may be overshadowed by questions over the euro-zone’s long-running sovereign debt crisis when ECB President Jean-Claude Trichet holds his monthly news conference at 8:30 a.m. Eastern.
The Bank of England, which had once been expected to join the ECB in kicking off a rate-hike cycle this year, is increasingly seen as unlikely to move until 2012.
“The MPC will hold off on raising interest rates for as long as possible in order to take pressure off the U.K. economy,” said Richard Marwood, portfolio manager at AXA Investment managers ahead of the rate decision.
The British consumer remains under pressure as unemployment and tax increases begin to bite, making a quick recovery in consumer confidence unlikely, he said.
U.K. home retailer Habitat was the latest high-street casualty of the nation’s slowing economy after being pushed into administration last month.
Minutes of the meeting, which will be released later this month, will be closely scrutinized after the June gathering showed MPC members becoming increasingly worried about the strength of the economy, analysts said. The minutes said members worried that the “current weakness of demand growth was likely to persist for longer than previously thought.”
The MPC voted 7-2 in June to leave rates on hold, with newcomer Ben Broadbent joining the steady-rates camp. He replaced Andrew Sentance, who had repeatedly pressed for rate rises.
Analysts said worries about the pace of growth are likely to continue to trump inflation concerns. Purchasing managers indexes, which gauge private-sector activity, point to a second-quarter slowdown from quarterly economic growth of 0.5% in the first quarter, said Howard Archer, chief U.K. economist at IHS Global Insight.
Meanwhile, consumer confidence fell in June and data from the Office for National Statistics showed a 1.2% monthly drop in service-sector output in April, he noted.
At 4.5%, annual consumer price inflation remains well above the central bank’s medium-term target of 2%, but the June minutes indicated members were becoming more confident inflation would fall over the two-year forecast period and saw little chance of a self-perpetuating inflation spiral materializing.
The ECB, meanwhile, is expected to press ahead with a rate hike in an effort to prevent inflation from feeding into the wage- and price-setting process.
But Trichet is certain to face a barrage of questions about Europe’s ongoing debt crisis as European banks and politicians struggle to come up with a plan that would see private bondholders share some of the cost of an additional bailout package for Greece.
ECB officials have warned that the central bank would refuse to accept Greek government bonds as collateral for loans to commercial banks if the “burden-sharing” efforts result in a default designation for Greek bonds.
Such a move would potentially throw the Greek and the European banking sector into crisis, stoking fears of a re-run of the financial shock that followed the collapse of Lehman Brothers.
Tensions in the euro zone rose after Moody’s Investors Service on Tuesday cut Portugal’s credit rating to junk status, citing worries the nation would also require a second bailout. The move prompted sharp criticism from European Union officials, who said the downgrade was premature and rash.
Portuguese and other peripheral euro-zone government bonds remained under pressure on Thursday.
A news report earlier this week said the ECB was prepared to continue accepting Greek bonds as collateral provided at least one ratings firm doesn’t deem Greece to be in default.
Trichet is certain to face questions over whether the ECB would continue to accept Greek debt as collateral or whether the ECB has contingency plans to prop up Greek banks in the event of a default, but strategists said he is likely to avoid getting pinned down on the issue.
”In all likelihood the market will be kept guessing as to what will happen if all credit ratings agencies deem Greece to be in default if and when the rollover plan is implemented,” said Jane Foley, senior currency strategist at Rabobank.
“That said, doubts that the ECB will really stick the knife into Greece at this stage should keep the euro propped up despite the uncertainty, although on balance we expect the pressure stemming from the periphery will outweigh any hawkish elements from the ECB today,” she said.
William L. Watts is a reporter for MarketWatch in Frankfurt.
