Bank of England holds course on rates, QE

The Bank of England left interest rates and the level of quantitative easing unchanged in an almost universally anticipated decision after recent signs have pointed to a relatively robust recovery.

The Bank's monetary policy committee kept interest rates at a record low level of 0.5 per cent and quantitative easing - the policy of buying government bonds to encourage spending - at £200bn ($308bn), or about 14 per cent of nominal GDP, after its meeting on Wednesday and Thursday.

The MPC last altered policy almost a year ago in November 2009, when it opted to pump a final £25bn extra cash into the economy via quantitative easing.

Recent figures have suggested the UK economy is rebounding strongly - second- quarter growth was the highest since 1999 and employment levels grew by the most since 1989.

But there are fears that the relatively strong performance in the second quarter will not last, and that it reflected temporary factors such as a boost from inventory building as well as delayed activity from the first quarter, when cold and snow halted many businesses in their tracks.

As public spending restraint and cuts begin to bite in the UK as elsewhere, and the US economy shows signs of slowing, some economists fear that a relapse into recession is possible.

Recent business surveys such as the purchasing managers indices have pointed to a rapid slowdown in growth in the third quarter. Industrial production is growing less quickly than it was earlier in the year, retail sales have slowed down and house prices appear to be falling or stagnant.

Inflation seems to be persistently above the 2 per cent target, although it fell in July and is down substantially from an April high. The Bank believes that inflation is largely above target because of the short-term effects of a VAT rise in January and a weak pound driving up the prices of imported goods.

At the last two meetings, eight members voted for the status quo, while external member Andrew Sentance was a lone voice calling for a 0.25 percentage point rise in rates.

The stronger-than-expected second-quarter growth will have added impetus to his claims that above target inflation is a real concern, but other officials and the Bank's forecasts have shown little sign of altering their view that the downside risks from problems in the financial sector or in Europe offset the risk that inflation expectations will get out of hand.

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