No change in UK interest rates expected

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LONDON (AP) — The Bank of England’s rate-setting committee is not expected to change its record low interest rate or monetary stimulus program but rather wait for clearer evidence on the health of the economy when it ends its two-day policy meeting on Thursday.

Analysts forecast the Monetary Policy Committee will keep its base interest rate at 0.5 percent when it announces its decision at 12:00 GMT (07:00 EST), and say any change in the 200 billion pounds ($320 billion) program of asset purchases — called “quantitative easing” — is unlikely.

Recent signs that Britain emerged from recession in the fourth quarter have yet to be confirmed by official data, and reports have shown that consumers are continuing to pay off debt rather than borrow to keep spending.

The Bank cut the key rate to half a percent a year ago as Britain reeled from the global credit crisis, and has kept it there since.

Analysts credit the lower rate with making it possible for many people with variable-rate mortgages to hold on to their homes even as unemployment rises and many other workers have been put on reduced hours.

The decision in November to invest another 25 billion pounds in quantitative easing revealed a split among the nine members, with one member opposing any expansion and another advocating a larger increase.

Last month, the committee was unanimous in voting for no change in the program.

The bank has said it will complete the current asset purchase program, which expands the money supply by essentially creating new money, by early February.

Economists don’t expect any change in the size of the program until then. Interest rates, meanwhile, are expected to remain at the current record low level well into 2010 as Britain makes a slow recovery out of its worst downturn since World War II.

Stephen Lewis at Monument Securities said the MPC faces a difficult first half of the year, with a national election due by June and the impact of quantitative easing still uncertain.

“Committee members are in the same boat as other forecasters in not knowing for sure whether, as 2010 progresses, the downward pressures on U.K. demand will overwhelm incipient signs of recovery,” Lewis said in a research note.

“They can have no clear idea how one of the most important variables bearing on the outcome, namely, fiscal policy, is likely to develop from here.”

The latest data released Wednesday from the Chartered Institute of Purchasing and Supply bolstered hopes that the U.K. had emerged from recession in the fourth quarter, which would make it the last major economy to return to growth.

The CIPS activity index for Britain’s services sector, which accounts for 70 percent of gross domestic product, stood at 56.8 in December; a reading above 50 indicates growth.

Lenders have reported an increase in house purchase mortgages approved in recent months and average house prices have risen, though suspicions persist that improvements are an artificial product of a depressed market in which low numbers of houses are for sale.

On the down side, consumer confidence dropped in December, the Nationwide Building Society said Wednesday. Only 34 percent of the survey sample expected the economy to be better in six months time, compared to 41 percent in November.

Tags : britain economy business eu recessions and depressions united kingdom
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