UPDATE 1-BoE holds rates at 0.5 pct, focus shifts to forecasts

Thu May 5, 2011 12:50pm BST

* Bank of England keeps rates at record low 0.5 percent

* Arch-hawk Sentance fails to get rate rise at final meeting

* His departure may push balance decisively in doves' favour

* Focus shifts to quarterly inflation report on May 11

By David Milliken

LONDON, May 5 (Reuters) - The Bank of England kept rates at a record low 0.5 percent on Thursday, in a widely expected move after a run of subdued data cast doubt on the strength of Britain's economic recovery.

The decision will disappoint arch-hawk Andrew Sentance, who steps down at the end of the month after nearly 5 years on the BoE's Monetary Policy Committee, and there is a strong risk that pressure for higher rates will ebb away after his departure.

Just a few weeks ago, markets were discounting a better than evens chance that the MPC would agree to raise rates for the first time since 2007 at May's rate meeting.

But a surprise fall in inflation -- and a clutch of data suggesting the economy has struggled to bounce back from an unexpected slump at the end of last year -- has now pushed back market expectations for a rate rise to the end of the year.

"Relatively soft UK activity data, plus the drop in CPI inflation to 4.0 percent in March, had removed any realistic expectations of a rate hike today," said Philip Shaw, an economist at Investec.

Financial markets did not move after the BoE announcement. Sterling had fallen to a 13-month low against the euro EURGBP= beforehand, due to the divergence between BoE policy and the rate-tightening cycle that the European Central Bank looks to have embarked on.

MAY INFLATION REPORT

British markets' focus is now switching to the economic forecasts in the BoE's quarterly Inflation Report, which BoE Governor Mervyn King will present next Wednesday.

"We look for a downward revision to the MPC's growth projections for this year and next, which will be more than enough to offset any short-term news on inflation," said David Tinsley, an economist at National Australia Bank.

King has long insisted that the overshoot in British inflation -- which is double the Bank's 2 percent target -- has been due to a series of one-off shocks from sterling weakness, commodity price rises and increases in sales tax.

These will fade, while growth remains vulnerable to the government's programme fiscal tightening, that aims to largely eliminate a budget deficit of around 10 percent of GDP over the next four years, more dovish BoE members argue.

Sentance, by contrast, has highlighted the risks of a steady erosion of public confidence in the BoE's willingness to curb inflation, as well as the long-term threat of imported inflation from a strong global economy.

In April, Sentance was supported in his call for higher rates by external MPC member Martin Weale and BoE chief economist Spencer Dale -- but two weeks ago Weale told Reuters about his concerns regarding weak growth. [ID:nL9E7FB002]

A voting breakdown for Thursday's meeting will not be published until May 18, but some economists think that Weale or Dale may ditch their rate rise call.

And Sentance's successor, former Goldman Sachs economist Ben Broadbent, is unlikely to take as tough a line on inflation.

"We doubt that Broadbent will be as hawkish, but it remains to be seen whether the change of personnel will be sufficient to alter the dynamics on the committee," said Investec's Shaw. (Reporting by David Milliken, editing by Mike Peacock)