LONDON: The Bank of England is to forecast and maintain its key interest rate at a record-low 0.50 percent in a vote Thursday, when the ECB is widely expected to announce its first hike in almost two years. The European Central Bank is expected to announce its first interest rate hike since July 2008, from an all-time low of 1.0 percent, to combat high inflation across the eurozone. Inflation is even higher in Britain but because its recovery from recession has stalled, the Bank of England (BoE) is expected to wait a while longer before embarking on a policy of rate tightening.
"Investors now have to contemplate the prospect of higher interest rates, at least in Europe over the near term as this week the ECB are expected to hike their base rate from 1.00 percent to 1.25 percent," said Simon Denham, an analyst at trading group Capital Spreads.
"The BoE on the other hand is due hold fire as things in the UK continue to look rather fragile," he added. Recent official data showed Britain's economy shrank by 0.5 percent in the final quarter of 2010, while analysts have said that the government's austerity drive will hinder growth this year. Britain's Conservative-Liberal Democrat government is slashing state spending in a bid to virtually eliminate a record public deficit it inherited from the previous Labour administration after winning power last year. Britain also faces further rises to its consumer price inflation, whose annual rate jumped to 4.4 percent in February, the highest level for more than two years and more than double the Bank of England's official target of 2.0 percent.
"A further increase in the rate of inflation would clearly make the MPC increasingly nervous as it eyes its credibility as an inflation tackling force," said Victoria Cadman, an economist at financial group Investec. In March, the BoE's Monetary Policy Committee (MPC) voted 6-3 to keep rates at 0.50 percent, with those in favour of a rise pointing to inflationary pressures.
"There is little to suggest that the Monetary Policy Committee has shifted its position at all since its last meeting. A rate rise therefore does not look very likely," said Vicky Redwood at research group Capital Economics. The BoE slashed interest rates to 0.50 percent more than two years ago, in March 2009, when it also launched a radical quantitative easing (QE) programme to help drag Britain out of a deep recession. Under QE, the bank has created some £200 billion (235 billion euros, $322 billion) of new money by purchasing government bonds and high-quality private sector assets so as to give the economy an added boost. Britain's recession, sparked by the global financial crisis, ended in the final quarter of 2009.
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