Thursday, February 10, 2011

BoE keeps rates steady despite inflation risk

The Bank of England kept its key interest rate at a record low of 0.5 percent, judging that the threat from rising inflation will prove temporary and that Britain's recovery remains in doubt.

Shock data last month showed Britain's economy went into reverse at the end of last year, and headwinds from tax rises and public spending cuts look set to persist for some time.

Economists had been unanimous in predicting a steady rate outcome but money markets had priced in around a 20 percent chance that rates would rise to 0.75 percent.

The BoE's decision to hold fire will come as a relief to the government which is hoping loose monetary policy will cushion the blow from its fiscal tightening.

However, it will also heighten criticism that Britain's central bank is ignoring its price stability mandate. Inflation has been more than a percentage point above its 2 percent target for the past year and looks set to shoot even higher as the recent jump in oil and commodity prices feeds through.

BoE Governor Mervyn King warned last month that inflation could rise as high as 5 percent in the coming months. But he reiterated his view that it would be back on target by early next year, due to slack in the economy and the absence of further inflationary shocks like last month's rise in sales tax.