BoE leaves policy on hold as British economy worsens

LONDON (Reuters) - The Bank of England left its monetary policy unchanged on Thursday, judging that its July decision to expand purchases of government bonds is enough stimulus for now despite the danger of a prolonged slump.

Since the BoE's Monetary Policy Committee met last month, official data has shown that Britain's economy is in a much deeper recession than previously thought, with little sign of an imminent rebound, putting pressure on the country's coalition government to do more to boost growth.

But after a two-day meeting that ended earlier on Thursday, the MPC made no change to its current program to buy 50 billion pounds of British government bonds, which will take its total purchases to 375 billion pounds by early November.

"They accept there's a speed limit on how quickly they can use an asset purchase program, so even if they are thinking of expanding it in due course, there's no point in ramping up the pace of purchase or the target now," said Societe Generale economist Brian Hilliard.

The central bank also left its interest rate unchanged at 0.5 percent, in line with a Reuters poll of economists, who overwhelmingly said they did not expect any change to interest rates or to the BoE's gilt purchases.

Sterling and British government bond prices were unchanged after the decision, as investors' attention shifts to Frankfurt, where European Central Bank President Mario Draghi is under pressure to deliver on his pledge last week to do whatever it takes to save the euro.

Most economists do expect the BoE to approve further government bond purchases, but only later this year, and they also think the BoE could possibly even cut interest rates further -- something it has steadfastly resisted since its last rate cut in March 2009.

At July's meeting, MPC members said they may reconsider a rate cut in a few months time once they have assessed the impact of a new BoE and finance ministry scheme to offer cheap credit to banks that lend to businesses and home-buyers.

This Funding for Lending Scheme was also a major reason why two MPC members, Ben Broadbent and Spencer Dale, opposed further gilt purchases in July, as they wanted to assess its impact before loosening policy further.

The BoE made no statement alongside its August policy decision, as usual when there is no change.

A much clearer insight into its outlook will come on August 8, when BoE Governor Mervyn King presents the central bank's quarterly forecast update.

"King will stress -- as he has for the past year -- the damage from the euro zone crisis and the impact of that on the growth and inflation forecasts," said SocGen's Hilliard.

Downward revisions are likely to both the growth and inflation forecasts. As well as weak growth, inflation has fallen much faster than the BoE predicted in May to hit a 2-1/2 year low of 2.4 percent in June, close to the central bank's 2 percent target.

(Additional reporting by Sven Egenter and Olesya Dmitracova; editing by Hugh Lawson)

Source: http://news.yahoo.com/boe-leaves-policy-hold-economy-worsens-110609062--business.html

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