Bank of England to sit tight over rates

LONDON, Aug 3, 2011 (AFP) - The Bank of England will leave its main interest rate at a record-low 0.50 percent on Thursday amid weak economic growth in Britain and lingering debt strains in the neighbouring eurozone, analysts said.

The BoE is also set to decide against pumping more new money into the economy, with British inflation still far above the central bank's target rate, experts added.

"The run of weaker news on the economic recovery has made a near-term interest rate rise even less likely than before," said Vicky Redwood, senior analyst at Capital Economics research group.

Britain's economy, struggling to absorb deep budget cuts, slowed to a trickle in the second quarter, with expansion of only 0.2 percent, official data revealed last week.

However it was partly impacted by the royal wedding on Friday, April 29, when many workers were granted a day off by employers to celebrate the marriage of Prince William and Catherine Middleton.

"Admittedly, the Office for National Statistics indicated that special factors could have knocked off up to 0.5 percentage points off second quarter growth," said Howard Archer, European economist at IHS Global Insight research group.

"However, there are serious uncertainties over just how much these factors held back growth in the second quarter and the fact is that the UK economy has barely grown since the end of the third quarter of 2010."

The International Monetary Fund on Monday maintained its growth forecasts for Britain but warned that risks from the eurozone debt crisis, spending cuts and volatile commodity prices could demand a change to BoE policy.

The central bank slashed interest rates to 0.50 percent more than two years ago, in March 2009, when it also launched the radical stimulus programme known as quantitative easing that helped drag Britain out of a deep recession.

Under QE, the central bank injected £200 billion of new money into the British economy between March 2009 and February 2010.

"Given the negative tone of much of the UK data recently, the main policy question seems to be whether the (BoE) committee is sufficiently concerned over the evidence of weaker economic activity to sanction more QE," said Philip Shaw, economist at Investec financial group.

"Our judgement is that most members are unsettled by a risk that growth is grinding to a halt, but that they are not at the stage where they feel that further easing is appropriate."

Some economists argue that more stimulus would fuel Britain's annual inflation rate, which at 4.2 percent in June is already more than double the BoE's official target of 2.0 percent.

Also on Thursday, the European Central Bank is tipped to keep its main interest rate at 1.50 percent, with inflation falling, business confidence down and markets nervous about debt contagion in the eurozone.

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