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Bank of England maintains record-low interest rate
2009-10-08
LONDON (AFP) - The Bank of England kept its key interest rate at a record low 0.5 percent on Thursday and held to credit-easing plans while waiting to see if the economy builds on signs of recovery from recession. The announcement, in line with market expectations, left economists pondering the next step after Australia became this week the first advanced economy to raise rates since the global financial crisis. In a separate move on Thursday, the European Central Bank also froze its main eurozone interest rate at a historic low of 1.0 percent as it too battles a deep downturn in the 16-nation economic bloc. "The Bank of England's Monetary Policy Committee (MPC) today voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent," the BoE said in a statement after a two-day meeting. "The committee also voted to continue with its programme of asset purchases totalling 175 billion pounds (194 billion euros, 287 billion dollars) financed by the issuance of central bank reserves." It added that the so-called quantitative easing (QE) programme would take another month to complete. "The MPC remains in 'wait-and-see' mode for now," said IHS Global Insight economist Howard Archer, adding that policymakers would wait until the BoE's quarterly economic forecasts, due next month, before deciding whether to change stance. The BoE had in March slashed British borrowing costs to the current record low level and launched the radical QE policy in a bid to lift Britain out of recession. Under QE, the bank creates money by purchasing bonds from commercial institutions in the hope of boosting lending to businesses and individuals. "Clearly the focus will soon shift towards next month's meeting by which time the committee will have the benefit of a set of new forecasts, and the BoE will have met the current QE target," said Investec economist Philip Shaw. Britain's economy shrank by 0.6 percent in the second quarter compared with activity in the first three months of 2009, which was better than the previous estimate of minus 0.7 percent, recent data showed. That was the second upgrade to the forecast since July -- but it was still the fifth quarterly contraction in a row amid soaring unemployment. For further insight into this week's BoE decision, traders must wait until October 21 when minutes from the meeting will be published. Earlier this week, Australia became the first advanced economy to raise interest rates since the global financial crisis and promised more rises to come. The Reserve Bank of Australia announced a hike of 25 basis points to 3.25 percent, lifting rates off a 49-year low after an aggressive round of cuts credited with helping fight off the worst global downturn in decades. However, Andy Denis, senior economics lecturer at London's City University, argued that the Australian decision to raise rates was "premature." "Australia has just become the first G20 country to raise interest rates, indicating confidence that the worst of the recession is over, and that dangers of inflation due to very loose monetary policy are starting to worry policymakers," Denis told AFP. "In my view this is premature. The IMF believes that 'the main risk is that private demand in advanced economies remains very weak'. The Bank clearly agrees." The warning from the International Monetary Fund (IMF) was contained in its semi-annual World Economic Outlook that was released in Istanbul earlier this month.
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