By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The Bank of England, as expected, made no changes to monetary policy on Thursday, leaving its key interest rate at a record low in the face of tepid economic growth.
The nine-member Monetary Policy Committee left the bank’s key lending rate at 0.5% and continued to leave the central bank’s program of asset purchases, the linchpin of its quantitative-easing program, on hold.
Attention now turns to European Central Bank, which is fully expected to leave its key lending rate unchanged at 1.5% when it announces the results of its monthly policy meeting at 1:45 p.m. local time, or 7:45 a.m. Eastern.
The main event will be ECB President Jean-Claude Trichet’s monthly news conference at 8:30 a.m. Eastern, which is certain to focus on increasing turmoil in European bond markets and fears that the euro-zone’s debt crisis is in danger of engulfing Italy, the region’s third-largest economy, and Spain, its fourth largest.
Meanwhile, economists have continued to push back expectations for a hike in the Bank of England’s key rate, which has stood at 0.5% since March 2009.
While British inflation remains well above the 2% annual target after dropping to 4.2% in June from 4.5% in May, the lack of any sign inflation pressures are feeding through to wages and continued slack in the labor market appears to have provided comfort for most MPC members, said Howard Archer, chief U.K. economist at IHS Global Insight.
Inflation is still expected to hit 5% later in the year due to utility hikes.
But the softness of the recovery remains a top concern, economists said.
Data showed second-quarter gross domestic product grew by just 0.2% compared to the first three months of the year after a flat run in the previous two quarters combined.
Meanwhile, July surveys indicate retail sales are likely to have been weak while already-low consumer confidence continued to slide. Purchasing managers indicated a sharp slowing in manufacturing activity, although services-sector activity accelerated at its fastest pace in four months.
The MPC’s July meeting again found seven members voting in favor of steady rates, while two members maintained a call for a quarter-point rate hike. Economists noted MPC members will have discussed the central bank’s quarterly inflation report, which is set for release next week, at the meeting.
“With the MPC having a new quarterly forecast to consider, it may well be that the two members that have been voting for a rate increase over recent months take the opportunity presented by what will presumably be weaker growth and inflation forecasts to revise their vote,” wrote economists at Daiwa Capital Markets.
Minutes of the meeting will be released on Aug. 17.
Meanwhile, soaring borrowing costs for Italy and Spain have put European leaders under pressure to act. Italy and Spain are seen as too big to bail out with the euro-zone’s current rescue facilities.
A July agreement by euro-zone leaders to provide a second bailout to Greece and to revamp the region’s rescue fund have provided little comfort amid a lack of details regarding how the European Financial Stability Facility can be employed to shore up troubled sovereigns.
That puts pressure on the ECB to take action to stem the rise in Italian and Spanish bond yields, which have moved above 6% at the 10-year level, by using the central bank’s bond-buying program, which has been left unused for several weeks.
“The market will focus on Trichet’s attitude towards supporting the Italian and Spanish bond markets,” said Anders Moller Lumholtz, analyst at Danske Bank in Copenhagen. “If the ECB is ready to step in and buy, this would be a majorly positive event. Equally, a rejection to discuss the issue could lead to deteriorating markets.”
Analysts said Trichet is unlikely to provide strong clues to future rate moves in an effort to keep options open as the central bank deals with ongoing inflation worries set against signs the euro-zone economy has continued to lose momentum in the current quarter.
