Bank of England holds interest rates at record low

 

The Bank of England resisted injecting further emergency medicine into the UK economy today as optimism over finding a solution to the eurozone debt crisis grew.

Bank governor Sir Mervyn King and his colleagues on the Monetary Policy Committee (MPC) held the quantitative easing (QE) stock at £325 billion and maintained interest rates at record lows of 0.5%.

While the decision echoed that of the European Central Bank yesterday, China's central bank moved to shore up its powerhouse economy by slashing its benchmark interest rate for the first time since 2008, dropping the one-year deposit rate to 3.25% from 3.5%.

World markets were boosted by the move, as well as improved sentiment on the continent where political leaders were holding talks over the future of the single currency, including tackling the banking crisis in Spain.

Chancellor George Osborne has said he is "optimistic" a solution will be found to the Spanish banking crisis, while Prime Minister David Cameron pushed his eurozone counterparts to act quickly.

Sir Mervyn has frequently cited the eurozone's woes as the biggest threat to the UK economic recovery and has urged political leaders to form an urgent response.

Pressure on the Bank to implement more stimulus measures has been mounting in recent weeks after official figures showed the UK's double-dip recession was deeper than previously thought, with a 0.3% fall in the first quarter of 2012.

And last week, a purchasing managers survey revealed a sharp and sudden contraction in the manufacturing sector, prompting fears of a prolonged recession.

But hopes for the UK recovery were boosted earlier today when a closely-watched survey of the powerhouse services sector in May revealed robust growth, allaying some concerns over a worse-than-expected report on the smaller manufacturing sector last Friday.

Anna Leach, the CBI's head of economic analysis, said the MPC's decision would have been a "tricky one".

She said: "It seems that a 'wait and see' position has been adopted for the moment. The ongoing crisis in the euro area will continue to put pressure on fragile business conditions for the foreseeable future.

"But we still expect the UK economy to improve modestly later in the year, with further falls in inflation providing some support to family incomes."

IMF boss Christine Lagarde also called on the Bank to lower interest rates further to help the UK weather the eurozone debt crisis.

And inflation continued to fall in April, providing more leeway for a fresh money injection.

Philip Shaw, chief economist at Investec, said he still expects an additional £50 billion QE boost in August - but action could be taken as soon as next month.

He said: "We consider that it would be wrong to rule out more QE. The crisis in the euro area poses a number of very obvious downside risks to the British economy.

"Meanwhile UK growth looks set to remain below trend, at best, in any case over the next year."

PA

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