BoE holds steady course as UK stumbles towards growth

The Bank of England held back from giving Britain's fragile recovery an extra boost on Thursday, as the economy appears to have narrowly avoided falling back into recession despite a shock drop in manufacturing output in the first months of 2012. The National Institute of Economic and Social Research (NIESR), one Britain's leading economic think-tanks, estimated that the economy missed a recession by the smallest possible margin, growing by just 0.1 percent in the first quarter.
Britain's economy has not recovered fully from the 2007-2009 crisis that left the country poorer and vulnerable to the euro zone's debt problems, which fuelled a fall in output at the end of last year and raised fears of a new downturn. A surprise 1 percent dive in UK manufacturing output in February, announced earlier on Thursday, showed that the economy was still on shaky ground after a series of more upbeat business surveys had indicated that a modest recovery was on track.
Bank of England Governor Mervyn King has warned of a long and arduous road back to economic health, predicting a bumpy ride for most of 2012 as the dangers from the euro debt crisis linger and events such as an extra public holiday for the Queen's Diamond Jubilee distort the course of the economy.
Even a minor technical recession - defined as two consecutive quarters of falling GDP - would be a blow for finance minister George Osborne, who defended his tough austerity plan aimed at erasing a huge deficit in last month's budget. At its monthly meeting on Thursday, the central bank's Monetary Policy Committee (MPC) left the total of its asset purchases at 325 billion pounds and kept interest rates at their record low of 0.5 percent, a move that had been unanimously expected by analysts polled by Reuters. "Since the end of 2011, when many were extremely concerned about an economic meltdown in the euro zone, the short-term outlook has improved," said Scott Corfe, economist at economics consultancy CEBR.
Official figures for gross domestic product in the first quarter are not due until April 25. Following a 0.3 percent quarter-on-quarter fall in GDP in the last three months of 2011, they will determine whether Britain has lapsed back into recession or avoided it.
The pound hit a fresh 2-1/2 month high against the euro on Thursday as worries about the euro zone debt crisis and rising Spanish borrowing costs outweighed the weak British data.
Most economists believe the BoE will not expand its quantitative easing programme this year, and the recent output figures did little to change that view. "Recent economic data has been more encouraging, and with oil prices high, there's now less certainty around how far and how fast inflation will fall," said Ian McCafferty from the Confederation of British Industry. The Bank of England, along with the government, forecasts that lower inflation will bring some relief to consumers and allow more consumption.
But a recent jump in oil prices and rising food costs caused by a lack of rain in parts of England raised fears that inflation, which was 3.4 percent in February, will not fall towards the BoE's 2 percent target as fast as policymakers hope. Economists said Britain should return to growth in the first three months of 2012 as the wider measure of industrial output grew in February thanks to increased energy production. The dominant services sector has also been improving.
Nonetheless, the government predicts growth of just 0.8 percent this year, only a fraction more than in 2011. In another encouraging sign that some consumers are confident enough to spend more, new car registrations rose by 1.8 percent in March, data showed on Thursday. "Domestic demand for new cars is showing signs of recovery," said the chief executive of car lobby SMMT, Paul Everitt. Consumers have taken a hammering from a combination of the government's austerity measures to reduce the budget deficit, rising prices that have outpaced wage growth, and the relatively higher cost of credit from banks compared with previous years.