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Bank of England keeps record low rates
Written by Saumyatanu   
Friday, 10 December 2010 14:25

Bank of England keeps record low rates

The Bank of England voted on Thursday to keep its key interest rate at a record low 0.50 percent amid expectations that Britain's robust economic recovery will slow next year.

BoE policymakers also decided to maintain the size of the central bank's stimulus programme at 200 billion pounds (238 billion euros, 315 billion dollars).

Both announcements had been widely expected, while minutes of the meeting to be published on December 22 will explain the bank's reasons.

"The Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5 percent," the BoE said in a statement issued after a two-day meeting and its last one of 2010.

"The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at 200 billion pounds."

The BoE sat tight amid strong consumer spending ahead of Christmas and before the introduction of tax hikes and cuts to government expenditure in 2011 which analysts say will likely dent growth and boost inflation.

Britain's economy expanded by a robust 0.8 percent in the third quarter from the previous three months, and expanded 2.8 percent in the July-September period compared with a year earlier.

However, the government expects growth to slow more than expected in 2011 and 2012 as its sweeping austerity measures begin to bite.

"Despite the strong growth recorded in the second and third quarters of 2010 the economy remains 3.9 percent smaller than it was in the first quarter of 2008," ING bank analyst James Knightley said.

"As a result, we continue to doubt that the Bank of England will look to raise interest rates next year."

Britain escaped from a record-length recession in late 2009 after a fierce worldwide downturn sparked by the global financial crisis.

However, in a bid to slash a record-high public deficit, the coalition government has launched the biggest public spending cuts in decades.

It has also unveiled plans to increase sales tax, or VAT, to 20 percent from the current 17.5 percent in January -- a move many economists expect to dent consumption significantly.

Interest rates have meanwhile stood at 0.50 percent since March 2009, when the central bank also launched its extraordinary stimulus programme, in the form of quantitative easing (QE), to drag Britain out of a deep recession.

Under QE, the bank has created some 200 billion pounds of new money by purchasing government bonds and high-quality private sector assets.

With Britain expected to experience slower growth in 2011, some economists are predicting that the BoE could resort to more QE in the months ahead.

The BoE's main task is to keep annual inflation at around 2.0 percent.

The latest official data showed that it hit a four-month high of 3.2 percent in October, way above the target, supporting calls for a rate increase soon.

"Those in favour of a rate rise now will note that annual consumer price index (CPI) inflation rose slightly in October ... compared with 3.1 percent in September," said Scott Corfe at the independent Centre for Economics and Business Research.