Bank of England keeps interest rates at 0.5 pct
LONDON — The Bank of England kept official interest rates at a record low of 0.5 percent on Thursday and said it would press on with its policy of increasing the money supply — but did not expand that program further.
The bank’s decision at the end of its monthly two-day rate-setting meeting represents a cautious stance, with early — but still tentative — signs of an economic recovery on the horizon.
Even as recent statistics show improvement in the housing market, retail sales and manufacturing and services sector, bank governor Mervyn King has downplayed suggestions that the worst is over, warning recently that the road to recovery will be longer and harder than anticipated.
The bank’s nine-member monetary policy committee voted to continue with its 125 billion pound ($205 billion) quantitative easing program of pumping newly created money into the economy by buying government and corporate bonds.
It had increased the size of the program at last month’s rate-setting meeting by 50 billion pounds to the current level and added three months to complete the asset sales, that were originally due to end in May. The bank stuck by that time frame on Thursday.
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said more quantitative easing was possible in the coming months “if there appears to be little progress on stimulating nominal demand.”
Some data suggest the British recession has bottomed out and the economy could begin its recovery before the end of the year. Data on the key services sector released on Wednesday as the nine-member monetary policy committee began its deliberations surprised economists by revealing that the sector — which makes up around 70 percent of the economy — grew in May for the first time in a year.
The Chartered Institute of Purchasing and Supply’s services survey showed an activity index reading of 51.7 in May — the first time the beleaguered sector has pulled into positive territory since April last year.
On Thursday, shortly before the rate decision was announced, the country’s biggest mortgage lender, Halifax, reported that house prices rose 2.6 percent in May.
However, most analysts are still stressing caution — Halifax warned in its survey that a one-month increase did not necessarily mean that the general trend of falling house prices had been reversed. Compared with a year earlier, prices were down 16.3 percent.
“Signs of stabilisation are one thing, a sustained recovery is an entirely different matter as demand conditions remain weak,” said RBS Group economics head Stephen Boyle.
The British central bank embarked on its quantitative easing program in March after lowering interest rates from 5 percent to 0.5 percent over just six months.
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