BoE expected to keep rates on hold

Bank of England policymakers are expected to pause for breath when they meet this week after the shock decision last month to pump an extra £50bn into the British economy.

The nine-strong Monetary Policy Committee made an unexpected move to increase efforts under its Quantitative Easing (QE) programme to £175 billion in August.

But it was even more of a surprise when minutes of the meeting revealed that Bank Governor Mervyn King had been out-voted in calling for an even greater money supply boost.

It emerged that Mr King and two MPC colleagues – David Miles and Tim Besley - had preferred a £75 billion expansion in August, taking the total to £200 billion.

According to the minutes, they warned that insufficient action would cause inflation to remain below target for a sustained period of time and might harm public confidence in the recovery, causing it to falter.

But the majority of committee members were concerned that too big an increase could have economic implications that were uncertain and difficult to rectify.

Recent encouraging indicators for the UK economy added to caution over the need for greater stimulus.

Economists believe that it is unlikely the MPC will step-in with more money for the economy so soon after increasing the QE limit, while it is also forecasted to keep interest rates at their historic low of 0.5% for some time.

The MPC has been keen to stress that the effects of QE will take time to filter through, which adds to the theory that they will likely sit back and wait before taking further action.

But Howard Archer, economist at IHS Global Insight, said more QE cannot be ruled out.

He said: “We suspect that divisions will remain within the MPC on whether or not to extend QE and to what extent.

“While we do not expect any change in QE this month, we certainly would not rule out an eventual further extension.”

He added: “The key factor is likely to be whether or not there are growing signs that bank lending is picking up, as this is vital to sustainable recovery prospects.”

While there are still concerns over bank lending levels, there have been further encouraging signs on the economy.

A survey from the key services sector last week showed activity grew at its fastest pace for nearly two years in August.

The services sector – the biggest contributor to the economy – recorded a reading of 54.1 on the business activity index, according to the latest Chartered Institute of Purchasing and Supply’s (CIPS) report.

And the housing market has continued to show improvements, leading to hopes that it will see a sustained recovery.

Investec economists believe that the MPC will hold off from reducing QE or raising rates until the economy is on a much firmer footing, but they are wary of possible pressure to hike the cost of borrowing in the first quarter.

Mr Archer forecasts rates to stay on hold “for some considerable time to come”.

“Indeed, we do not expect any rises until at least the latter months of 2010,” he added.

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