The Bank of England kept its main interest rate unchanged at the record low of 0.5 percent Thursday and said it will not be asking the government for the authority to pump more newly created money into the barely recovering British economy.
The rate-setting Monetary Policy Committee (MPC) voted to keep its asset purchase program unchanged at 200 billion pounds ($317 billion) but said it will continue to monitor the scale of the program and could ask the government to make further purchases.
The program boosts the money supply in the economy, thereby lowering interest rates across lending markets.
Both decisions had been widely expected in the markets but the bank's decision not to ask for more firepower helped the pound rally sharply in the wake of the statement. A currency falls if investors believe interest returns will lower.
Half an hour after the statement at 1230 GMT (7:30 a.m. EST), the pound was trading at $1.5873 from $1.5830 before.
The Bank of England said economic conditions had improved marginally — the British economy grew by a tiny 0.1 percent in the last three months of 2009 after six consecutive quarterly declines.
It noted that household spending was rising a tad and the rate of decline in business investment easing, while the recovering global economy had lifted demand for British exports.
It added that the "considerable stimulus from the easing in monetary policy, the lower level of sterling and the recovery in UK export markets should together support domestic activity."
However, it warned that credit conditions are likely to remain tight and that the need to reduce debts, both in the private and public sectors, would likely weigh on spending in the future.
Edward Menashy, chief economist at Charles Stanley, said that taken together private and public debt in Britain amounts to 466 percent of the British economy, slightly less than the 471 percent ratio in Japan, which has stagnated for the best part of a couple of decades as a result.
"As such this is a worst position than the battered Greek economy," he said. Greece is struggling with a debt and deficit crisis that has shaken the European Union.
None of those fears, however, emerged in Thursday's statement, in which the Bank said that on balance the nine-member rate-setting body believes that the prospect is for "a gradual recovery in the level of activity" and that inflation would likely fall below the 2 percent target for a period — in the year to December, changes in sales taxes from the year before and higher energy costs pushed inflation up to 2.9 percent.
"As the recovery is still nascent and the scale of fiscal tightening after the election unclear, the MPC has adopted a 'wait and see' approach," said Charles Davis, senior economist at the Centre for Economic and Business Research.
"In doing so, policymakers have bargained that the rise in inflation since the trough in September is a short term phenomenon and expect inflationary pressures from the sluggish recovery to be weak in the medium term," he added.
The Bank of England is due to unveil its latest quarterly economic projections next Wednesday and the minutes to the February meeting will be published on Feb. 17.
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