Bank of England Keeps Benchmark Rate Steady After Trichet Signals Increase - Bloomberg

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 U.K. economic recovery. Photographer: Simon Dawson/Bloomberg

March 10 (Bloomberg) -- David Bloom, global head of currency strategy at HSBC Holdings Plc, discusses Bank of England's interest-rate decision and outlook for the pound. The BOE kept its benchmark rate at a record low as policy makers chose to set aside concerns on rising inflation pressures to support the U.K. economic recovery. Bloom speaks with Bloomberg's Oliver Joy. (Source: Bloomberg)

March 10 (Bloomberg) -- Neville Hill, an economist at Credit Suisse Group AG, talks about the Bank of England's monetary policy and the prospects for higher inflation in the U.K. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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 U.K. economic recovery.

The Monetary Policy Committee, led by Governor Mervyn King, set the key rate at 0.5 percent for a 25th month, as forecast by all 61 economists in a Bloomberg News survey. They also left their bond program at 200 billion pounds ($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 U.K. officials voted for a rate increase last month, the economy shrank 0.6 percent 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 percent to $1.6157 as of 12:28 p.m. in London. Bonds remained higher, with the yield on the 10-year gilt falling 5 basis points to 3.61 percent.

Investors' Bets

U.K. consumer prices rose an annual 4 percent 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 percent in the third quarter and ease to the 2 percent goal in 2013.

Investors are predicting the Bank of England will boost borrowing costs to 0.75 percent in July and to 1 percent 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.

King said earlier this month that while raising rates too soon would be a "futile gesture," there is still a "perfectly reasonable case for doing it now." He argued the effect of higher commodity prices on inflation will prove temporary.

Factory Production

King has also said the recovery will be "choppy." Still, recent data indicate the contraction may have been a temporary setback. Factory output rose 1 percent in January, the most in 10 months, a report today showed. GKN Plc (GKN), which makes aircraft components for Airbus SAS, said on March 1 that full-year earnings more than doubled as global car production recovered.

"The outlook for our major markets is positive although some uncertainty remains, particularly around macro-economic conditions," Chief Executive Officer Kevin Smith said.

Central banks around the world are facing increasing inflation pressures as global demand recovers and commodity prices surge. Crude oil has jumped by about 30 percent in the past 12 months, while global food prices have soared 28 percent.

Trichet said March 3 an "increase of interest rates in the next meeting is possible" after the ECB held its key rate at 1 percent for a 23rd month. Sweden's central bank, which has increased its benchmark lending rate five times since July, on Feb. 15 predicted it will raise the rate four times this year.

BOE Minutes

U.K. price pressure has been amplified by a government sales-tax increase and the pound's decline. Sterling has weakened about 25 percent on a trade-weighted basis since the start of 2007, and an ECB rate increase that fuels a gain by the euro may exacerbate U.K. imported inflation.

Policy maker Andrew Sentance on Feb. 10 voted to increase the key rate to 1 percent, while Spencer Dale and Martin Weale called for an increase to 0.75 percent. The bank will publish the minutes of today's meeting on March 23.

"The tone at the meeting was probably hawkish but cautious about hiking too soon, and that should be reflected in the minutes," said Philip Rush, an economist at Nomura International Plc in London. "Inflation news has tended to be to the upside but the MPC is awaiting confirmation that the weakness in the fourth quarter was a one-off aberration."

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net