BoE keeps key interest rate at 0.5 percent as expected

Reuters

LONDON (Reuters) - The Bank of England kept its key interest rate at a record low 0.5 percent on Thursday as worries about Britain's lackluster recovery outweighed any concern about above-target inflation.

The no-change decision had been unanimously forecast by 60 economists in a Reuters poll and will come as little surprise to markets.

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While the European Central Bank looks certain to raise rates later this session, money markets are not fully pricing in a UK rate hike until mid-2012.

UK interest rates have stood at 0.5 percent since March 2009, when a deep recession and the threat of deflation prompted central banks around the world to slash rates to record lows.

Since then, inflation in Britain has soared to more than double the central bank's 2 percent target, but the BoE has been reluctant to tighten monetary policy at a time when the government's austerity measures are already dragging down demand.

Surveys of manufacturing, construction and services this week suggest the economy expanded by just 0.3 percent from April to June, after having shown no growth at all over the previous six months.

And even though inflation looks set to climb to 5 percent in the coming months, worries about persistently weak growth have even led some members of the Monetary Policy Committee to mull the case for additional asset purchases.

In June, two of the BoE's nine policymakers voted for a monetary tightening, one for more stimulus and the remaining six for the status quo. A breakdown of Thursday's vote will be published in two weeks' time.