Bank of England to keep rates low as Government spending cuts loom
The Bank of England is expected to hold interest rates at a record low on Thursday – and possibly for the rest of this year – as it seeks to safeguard Britain’s fragile recovery.
Bank of England Governor Mervyn King will be seeking to shield the British economy from the eurozone debt crisis, as David Cameron’s government prepares an emergency Budget on June 22 to tackle what Fitch Ratings calls a “formidable” debt burden.
The risk is that the size of Budget cuts needed could derail the economic recovery and plunge the nation back into a slump after it emerged from its worst recession on record last year.
GDP rose 0.3pc in the first quarter, slower than the 0.4pc pace recorded in the prior three months.
All 61 analysts in a Reuters poll forecast the central bank would keep borrowing costs at 0.5pc on Thursday and most see no move until early next year as rate-setters wait to see how economic conditions pan out.
The bank is also expected to maintain its quantitative easing programme of bond holdings at £200bn.
It will announce its decision at noon in London.
With inflation running 3.7pc, almost double the 2pc target, there are signs that some policymakers are starting to feel uneasy about price pressure and some economists see a small chance of a rate rise before the end of this year.
However, with the coalition Government having pledged to cut the country’s budget deficit, currently at almost 11pc of GDP, at a “significantly accelerated” pace – starting with £6bn of cuts this year – the Bank will want to wait until the scale of fiscal tightening is clear before deciding on whether to withdraw stimulus.
“Relative muted recovery following deep recession, the looming major fiscal squeeze and the risk to UK economic activity coming from the eurozone debt crisis make a strong case for the BoE to keep its finger off the interest rate trigger in the near term at least,” Howard Archer, economist at IHS Global Insight, told Reuters.