Bank of England keeps asset plan, interest rate steady to aid recovery

The Bank of England kept its benchmark interest rate at a record low as policy makers chose to set aside concerns on rising inflation pressures to support the UK economic recovery.

The Monetary Policy Committee, led by Governor Mervyn King, set the key rate at 0.5 per cent for a 25th month, as forecast by all 61 economists in a Bloomberg News survey. They also left their bond programme at £200 billion ($324 billion), as predicted by all 34 economists in a separate poll.

The decision comes a week after European Central Bank President Jean-Claude Trichet said euro-area policy makers may raise borrowing costs as soon as next month to tame price pressures. While three UK officials voted for a rate increase last month, the economy shrank 0.6 per cent in the fourth quarter and King has argued against tightening policy now as government spending cuts threaten growth.

“They haven’t had enough new data on activity in the past month” to convince some policy makers to change their vote, said David Tinsley, an economist at National Australia Bank in London and a former central bank official. “There’s a number of committee members in the pack who are still intending to move across to a hike, probably in May.”

The pound extended its decline against the dollar after the decision was announced and was down 0.3 per cent to $1.6157 as of 12.28 pm in London. Bonds remained higher, with the yield on the 10-year gilt falling 5 basis points to 3.61 per cent.

UK consumer prices rose an annual 4 per cent in January, twice the central bank’s target. In its quarterly Inflation Report published last month, the bank’s central projection was for price growth to peak at an average of 4.5 per cent in the third quarter and ease to the 2 per cent goal in 2013.

Investors are predicting the Bank of England will boost borrowing costs to 0.75 per cent in July and to 1 per cent in November, according to forward contracts on the sterling overnight interbank average compiled by Tullett Prebon Plc. Predictions earlier today were for the first increase in June.