Bank of England set to maintain 0.5% interest rate

Bank of England set to maintain 0.5% interest rate

Bank of England policymakers are unlikely to deliver an early Christmas present to the British economy today despite warnings that output could shrink again in the final three months of the year.

The Bank's Monetary Policy Committee (MPC) is forecast to keep interest rates at their record low of 0.5% and hold its quantitative easing (QE) stock at £375bn (€461.2bn).

The economy sprung back to life in the third quarter when gross domestic product (GDP) grew 1%, ending the longest double-dip recession since the 1950s.

A second estimate from the Office for National Statistics (ONS) confirmed the performance and revealed the strongest rise in household spending in more than two years in the period.

Howard Archer, chief UK and European economist at HIS Global Insight, expects no change in policy from the MPC but with the recovery "feeble, fragile and far from guaranteed" has forecast a QE boost in early 2013.

He said: "An increase in quantitative easing looks unlikely despite the very real possibility that the UK could suffer a renewed GDP dip in the fourth quarter, while an interest rate cut appears to be completely off the agenda."

The Bank's decision to hold policy in November effectively brought the QE programme to a temporary halt given that July's £50bn (€61.5bn) extension had been fully utilised.

But the minutes of the November MPC meeting appeared to keep open the possibility that the Bank will push the QE button again should the economy disappoint further.

The underlying picture of the economy remains bleak with a disappointing series of surveys on the services, construction and manufacturing sectors.

Bank governor Mervyn King said the economy could shrink again in the fourth quarter and the independent tax and spending watchdog, the Office for Budget Responsibility, agrees.

There were a few recent reports bucking the trend with a marked rise in consumer confidence in November and a robust CBI distributive trades survey for the retail sector.

In addition, there are also doubts among some MPC members over the possible impact, or lack of, of more QE.

Reinforcing belief that further QE is unlikely as soon as December, David Miles was the only one of the nine MPC members who favoured more QE in November.

The minutes recorded a case could be made for "further monetary easing" but there was little indication that any other MPC member was leaning towards further support.

The MPC also revisited the case for lowering interest rates from 0.5% to 0.25% at their November meeting after a significant gap and decided it "was unlikely to wish to reduce Bank Rate in the foreseeable future".

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