Bank of England sits tight on rates, stimulus

The Bank of England held interest rates steady at a record low of 0.5 per cent for the 20th consecutive month on Thursday as the British economy shows signs of unexpected strength.

The British central bank also kept its £200-billion (US$323-billion) asset-purchase programme on hold in Thursday's announcement - declining to follow the United States (US) Federal Reserve in injecting more stimulus into the economy.

Economists said the case for monetary policy easing in Britain is nowhere near as strong as in the US.

Gross domestic product growth of 0.8 per cent in the third quarter was double the expected improvement. Unlike the US, Britain also has low unemployment and high inflation, which is considered to have been a key factor in dissuading the central bank from more stimulus activity that could send prices yet higher.

Still, many economists believe the bank may restart the so-called quantitative easing programme to boost the money supply next year as harsh government spending cuts take effect.

"Despite recent resilient economic data and surveys, serious concerns and uncertainties remain about the economy's future strength with the substantial fiscal tightening set to increasingly kick in over the coming months," said IHS Global Insight chief economist Howard Archer.

Treasury chief George Osborne earlier Thursday defended those plans to slash £81 billion (US$128 billion) from public expenditure over the next four years as the government tries to bring down the country's large budget deficit.

The Public Accounts Committee claimed that the savings will rely on cutting crucial front-line services, but Osborne, who also revealed that the next annual budget will be presented on March 23, said the cuts were "credible and deliverable".

The conflicting issues of the looming spending cuts and high inflation have led in recent months to a three-way split within the central bank's nine-member Monetary Policy Committee and economists expect the minutes of the November meeting - to be released later this month - to show that trend has continued.

Policymaker Andrew Sentance is urging a quarter-point hike from the all-time low base rate of 0.5 per cent to tackle inflation, which is currently at 3.1 per cent, while colleague Adam Posen has been in favour of another £50 billion of stimulus.

The remaining seven members have voted for no change in rates or quantitative easing.

In a much-anticipated move Wednesday, the US central bank said it would buy US$600 billion of long-term government bonds by the middle of 2011 to further drive down rates on mortgages and other debt.

- AP