Bank of England Governor Mervyn King’s monetary policy may diverge further from the rest of Europe today as officials keep record-low interest rates to aid the recovery and guard against threats from the Greek crisis. The nine-member Monetary Policy Committee will hold the benchmark rate at 0.5 percent, according to all 51 economists in a Bloomberg News survey. They’ll announce the decision at noon in London, 45 minutes before the Frankfurt-based European Central Bank raises interest rates for the second time this year, according to a separate survey. With companies such as Bombardier Inc. cutting jobs and retailers Thorntons Plc and Carpetright Plc shutting stores, King is persisting in his tolerance of soaring inflation to aid the economic recovery. He defended his stance on June 28, saying the bank can hold off raising rates if there is a risk of “undesirable volatility in output” and also warned of threats to the U.K. from the debt crisis in the euro area. “The governor has made a clear case for keeping rates on hold and not tightening policy to get inflation down rapidly,” said Philip Shaw, chief economist at Investec Securities in London. “We see the first rate increase coming in November, but we’ve been tempted to push that call into 2012.” The Bank of England will also hold its bond-purchase program at 200 billion pounds ($320 billion), according to all 32 economists in a Bloomberg survey. ‘Volatility’ The ECB’s rate increase will lift its benchmark to 1.5 percent, the highest since March 2009. Sweden raised its benchmark repurchase rate to 2 percent on July 5, the seventh increase in a year. Beyond Europe, the People’s Bank of China raised key rates for the third time this year yesterday. Investors pushed back expectations for the next U.K. rate increase to beyond May 2012, according to forward contracts on the sterling overnight interbank average. A month ago, they were betting on a February increase. National Australia Bank, Citigroup Inc., Deutsche Bank AG and Nomura Holdings Inc. revised rate-increase forecasts in recent weeks. The pound has dropped against all 16 major currencies tracked by Bloomberg in the past three months. It traded at $1.5973 against the dollar as of 8:25 a.m. in London, down 0.2 percent from yesterday. Bonds fell, with the yield on the 10- year gilt up 1 basis point at 3.26 percent. Economic Outlook While inflation has accelerated to 4.5 percent, more than twice the central bank’s target, King said the remit “does allow for us to not to try to bring inflation back to the target immediately if that were to lead to undesirable volatility in output.” A majority of the MPC “have taken the view that to tighten policy now would be to risk that.” While the economy grew 0.5 percent in the first quarter, that followed a similar contraction in the previous three months. Markit Economics said its surveys of manufacturing and services point to gross-domestic-product growth of 0.3 percent “at best” in the second quarter. Policy makers said in the minutes of their June meeting that the current weakness of demand growth is “likely to persist for longer than previously thought,” with some raising the possibility that further bond purchases may be needed. In addition, Europe’s debt crisis “highlighted the potential for further adverse shocks,” the minutes said. Job Cuts Retail sales fell 1.4 percent in May as consumers grappled with faster inflation, the biggest fiscal tightening since World War II and signs the labor market is coming under pressure. Bombardier, the world’s biggest trainmaker, said this week it will eliminate more than 1,400 jobs at a plant in Derby, England after it lost a government contract. “There’s no evidence that the consumer is getting any better,” said David Tinsley, an economist at National Australia Bank in London and a former central bank official. “The bank isn’t coming under any pressure for an increase.” The MPC split three ways on policy last month after the rate of price growth convinced Chief Economist Spencer Dale and policy maker Martin Weale to continue a push for a quarter-point rate increase. Minutes of today’s decision will be published July 20. The pound’s drop of about 25 percent on a trade-weighted basis, a sales-tax increase and rising commodity prices have fed price pressures. Britons’ inflation expectations for the coming year jumped to 3.9 percent in June, the highest since 2008, according to a YouGov Plc poll for Citigroup, raising the risk that faster inflation gets entrenched. Deputy Governor Paul Tucker said June 28 that he is “one of those who from the back end of last year has worried about the possibility of an upward drift in inflation expectations.” He also has a “high threshold” on the need for more stimulus. “Though inflation will get close to 5 percent in the near term, it will be below target in 2012,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official who forecasts no rate increase until at least 2013. “The weak data and soft CIPS surveys support the view for no change.” To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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