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Bank of England set to sit tight despite high inflation

Recent official data showed British annual inflation hit a 17-month high in April. -AFP

Wed, Jun 09, 2010

By Ben Perry

LONDON - The Bank of England is set to keep its key interest rate at a record-low 0.50 percent on Thursday after a meeting of policymakers despite higher-than-expected inflation, analysts said.

The BoE is also widely expected to avoid revisiting its so-called quantitative easing policy, under which it has pumped 200 billion pounds (S$410 billion) of new money into the economy.

"In common with what appears to be all commentators, we expect policy to remain on hold, with the bank rate frozen at 0.5 percent and the QE target held at 200 billion pounds," said Investec Securities analyst Philip Shaw.

Although recent official data showed British annual inflation hit a 17-month high in April, Bank of England governor Mervyn King blamed temporary factors and forecast the figure would drop this year.

Consumer Price Index (CPI) annual inflation, the government's target measure, hit 3.7 percent last month for the highest level since November 2008, according to the Office for National Statistics.

April's rate compared with 3.4 percent in March, while market expectations had been for a rise to 3.5 percent.

The BoE is tasked by the government with trying to keep the rate at 2.0 percent.

"Despite consumer price inflation spiking up to 3.7 percent in April - nearly double its 2.0 percent target level - the Bank of England's Monetary Policy Committee is still odds-on to keep its key interest rates down at 0.50 percent for a 16th successive month at the conclusion of their June meeting on Thursday," said Howard Archer, chief Britain economist at IHS Global Insight.

"Relatively muted recovery following deep recession, the looming major fiscal squeeze and the risk to UK economic activity currently coming from the eurozone debt crisis make a strong case for the Bank of England to keep its finger off the interest rate trigger in the near term at least," he added.

New Prime Minister David Cameron on Monday said the state of Britain's finances was 'even worse than we thought' as he warned of 'painful' and unavoidable cuts to tackle the record deficit.

Britain meanwhile needs to put its public finances in order much quicker as it faces a 'formidable' fiscal challenge after an unprecedented shock to the economy, Fitch Ratings warned on Tuesday.

Fitch said that 'following an unprecedented economic and financial shock, the scale of (Britain's) ... fiscal challenge is formidable and warrants a strong medium term consolidation strategy - including a faster pace of deficit reduction than set out' in April by the previous Labour government.

The international ratings agency, looking ahead to the new government's June 22 emergency budget, did not comment directly on the outlook for Britain's top AAA rating but noted that debt had risen very fast since 2008.

Britain chalked up a public deficit equal to 11.1 percent of gross domestic product (GDP) in the fiscal year to March 2010, one of the largest in the European Union and way above the EU limit of three percent.

Back in March 2009, the Bank of England cut interest rates to a record low 0.50 percent in an attempt to breathe life into the battered economy.

The bank also decided that month to launch quantitative easing, whereby it buys bonds from commercial institutions in a bid to help boost lending.

The BoE froze the radical QE policy in February but has not ruled out an extension to the scheme.

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