BoE Keeps Rates Steady, Makes no Change to QE

The Bank of England voted to make no change to its monetary policy this month, in a widely expected decision as it waits to see how much growth next year suffers from UK public spending cuts and euro zone turmoil.

None of the more than 60 economists polled by Reuters last week expected the BoE's Monetary Policy Committee to change the 0.5% interest rate and 200 billion pounds ($317 billion) of quantitative easing that have been in place since February.

Financial markets did not move after the decision.

"The economic news over the past month has been consistent with policy on hold," said George Buckley, chief UK economist at Deutsche Bank.

Despite a debt bailout for neighboring Ireland, the economic outlook for Britain has changed little since November's MPC meeting and consumer price inflation has risen further above its 2% target to 3.2%.

Manufacturing activity has been strong following robust overall economic growth of 0.8% in the third quarter, though trade data on Thursday was unexpectedly weak, casting doubt on the BoE's hopes of an export-led recovery next year.

The central bank will not publish details of the MPC's vote or discussion until December 22, but most economists expect a repeat of last month's three-way policy split.

MPC member Andrew Sentance said since November's meeting that he still saw a need to raise interest rates, while his dovish counterpart Adam Posen reiterated his call for an extra 50 billion pounds of asset-buying with new money.

"If anything the recent data flow has tended to favor Sentance's position with the economy experiencing the strongest six-month period of GDP growth for 10 years," said James Knightley, UK economist at ING.

"However, the ongoing threat from fiscal austerity, tight credit conditions, falling house prices and the euro zone sovereign debt woes will continue to provide downside risks," he added.

Most economists do not expect rates to rise until late 2011, and only see more printing of new money if looming government spending cuts cause a bigger-than-expected economic slowdown next year.

The BoE forecast last month that it would take until early 2012 for inflation to return to target, in part because value-added tax on most goods and services will rise by 2.5 percentage points in January.

This tax rise is part of a four-year plan of fiscal tightening to tackle Britain's swollen post-financial crisis budget deficit, which will involve the deepest public spending cuts in decades.

The government and BoE predict that overseas demand will be able to take the place of domestic consumption, but even deeper fiscal retrenchment in major British export markets such as Ireland will make this a challenge.