Bank rate-setters adopt wait-and-see mode

Bank of England rate-setters were in "wait and see" mode today as they held off from delivering more aid to the recession-blighted UK economy.

The Bank had been expected to expand its quantitative easing (QE) programme - effectively printing money - by £25 billion to £150 billion, but took no further action after its two-day meeting.

The Monetary Policy Committee (MPC), which also held interest rates at their record low of 0.5% for the fourth month in a row, said it would review the policy in August.

The decision comes despite concerns over the fragility of recent signs of stabilisation in the economy following a steep decline.

Although recent survey data has been more positive, manufacturing output showed a surprise fall in May, and official figures showed a far worse than expected 2.4% slump in overall GDP in the first three months of 2009 - the biggest quarterly fall in more than 50 years.

The pound gained 1% against the dollar - climbing above 1.62 US dollars following the decision - as markets took the lack of action from the Bank as a sign it was more optimistic about prospects.

But according to the Bank's own data, credit conditions remain tight and lending to business fell in April and May - suggesting efforts to boost the money supply were having little immediate impact.

Experts suggested the MPC's decision to hold off was simply a delay to give it more time to assess the strategy with updated inflation forecasts next month.

IHS Global Insight's Howard Archer, who expects rates to be on hold at 0.5% well into 2010, said: "We doubt the Bank of England is bringing an end to the programme.

"Despite the recent improved data overall, serious economic and financial obstacles remain to any near-term return to sustainable growth. Indeed, the danger of relapses was highlighted by the disappointing renewed contraction in industrial production in May."

The CBI business group also predicted the programme would eventually be extended.

Chief economic adviser Ian McCafferty said: "After only five months, it is still too early to determine the effects on the wider economy. So, a further extension through the autumn is needed."

But the British Chambers of Commerce disagreed with the MPC's decision. Chief economist David Kern said: "It is important to significantly increase the programme's size, so as to underpin business confidence.

"We urge the Chancellor to increase the ceiling for the programme by a further £50 billion, to £200 billion."

Stephen Boyle, head of economics at Royal Bank of Scotland, said: "The decision to leave rates on hold was an easy one, but whether or not to step up quantitative easing was a much trickier proposition.

"Recent green shoots may ultimately prove nothing more than stabilisation after an abysmal first quarter.

"A further stimulus may yet be needed to put the economy back on an even keel, but for now, policymakers are prepared to wait and see."

Rate-setters considered mixed signals at their two-day meeting. The volatility in house price index data during recent weeks has signalled that the property market could be nearing its bottom.

But more positive industry survey data has clashed with gloomier output figures, while policy-makers will also be wary of the effect recent strengthening of the pound has had on exporters.

The Bank's credit conditions survey last week said overall credit availability to business had increased in the three months to mid-June, "though by less than expected".

And minutes of the MPC's June meeting said there was "no compelling evidence" that a recovery in bank lending would be any quicker than assumed a month earlier.

The MPC is charged with keeping Consumer Price Index inflation at 2%. The benchmark is currently above target at 2.2%, although it is expected to fall steeply later this year as the economic downturn weighs on prices.