Bank of England keeps stimulus, rates steady as economy slips


By Olesya Dmitracova

LONDON – The Bank of England stopped short of announcing further stimulus for Britain’s fragile economy on Thursday, but is widely expected to do so in February as the economy may have shrunk at the end of last year.

Britain is at risk of recession as global growth slows, government spending cuts bite and all-important consumers struggle with high inflation, tax hikes and slow wage rises.

And with the government’s hands tied by its pledge to erase the country’s large budget deficit in order to defend the top-credit rating, the onus is all on the central bank.

British industrial output posted a surprise fall in November, raising the prospect that the overall economy contracted in the fourth quarter of 2011 and given the central bank more reason to expand its 275-billion pound asset-buying quantitative easing (QE) program soon.

“Overall 50-billion pounds more QE next month seems to us to be virtually ‘baked in the cake’,” said Philip Shaw, economist at Investec.

“Moreover, steep declines in inflation should facilitate a further 50-billion pounds of asset purchases in May, taking the QE target to 375-billion pounds.”

The BoE also kept interest rates at record-low 0.5%, where they have been for nearly 3 years.

FALLING PRICES

All but one of the economists polled by Reuters had forecast the central bank would keep the target for its asset purchases unchanged, after raising it by 75-billion pounds in October.

Instead, economists expected it to unveil an extra 50-billion pound injection next month. BoE policymakers have been warning about the risk of an economic contraction and even recession in Britain as a debt crisis rages in its main trading partner, the eurozone.

The region’s central bank is also widely expected to keep rates steady at 1.0% when it announces its policy decision later on Thursday, pausing to assess the impact of the crisis-fighting steps it took in the final two months of 2011.

Recent mixed economic news in Britain had bolstered the view that the BoE might want to wait until February before deciding on more QE. By then the current round of asset purchases will be concluded and the bank will have its latest growth and inflation estimates.

A profit warning from Tesco, the world’s third-biggest retailer, after it reported its worst Christmas sales performance for decades, and other weak retail results have underscored that Britons have been cutting back on spending.

Some of Tesco’s limp performance was due to its “Big Price Drop” campaign in September, said chief executive Phil Clarke, adding that the group would cut more prices in coming months.

Centrica, the owner of British Gas, and EDF Energy also announced cuts in utility prices this week after raising them last year.

The news lends support to forecasts by the BoE that inflation – still just off a recent three-year high above 5% – will tumble early this year and dip below its 2% target towards the end of 2012, as economic weakness weighs on prices and one-off effects such as a 2011 sale tax increase disappear.

© Thomson Reuters 2012

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