Bank holds rates, keeps QE option up its sleeve

A clock displays the time just after midday, opposite the Bank of England in London March 10, 2011.

LONDON (Reuters) - The Bank of England left interest rates at a record low Thursday and kept up its sleeve the option of more stimulus under its quantitative easing program should an already struggling economy weaken further.

The Bank issued no statement with its decision, but minutes from the meeting may show an anxious discussion about what tools could be used if the recovery fails to gain traction.

The economy barely grew in the second quarter following six months of stagnation, and data from the United States and the euro zone suggests a global slowdown is becoming entrenched. Even inflation, currently more than twice the Bank's target, appears to be peaking.

"If the Bank of England does act anytime soon, it is most likely to be to relax monetary policy," said Howard Archer, UK economist at Global Insight.

The unchanged verdict had been widely expected, though there was an outside chance the Bank could have surprised with more stimulus, particularly after a shock easing by the Swiss central bank Wednesday.

World stocks have tumbled to a five-month low as investors have fretted that fiscal cutbacks and a prolonged slowdown will aggravate Europe's debt crisis.

The focus now shifts to the European Central Bank's media conference later this session to see whether it can shore up confidence and prevent the crisis spreading from the periphery to bigger countries such as Spain and Italy. The ECB also left rates steady after two increases so far this year.

RATE RISE A DISTANT PROSPECT

UK interest rates have stood at 0.5 percent for more than two years -- already the longest period of inertia since World War Two -- and money markets are not pricing in any realistic chance of a hike until the second half of 2012.

The coalition government, elected last year on a deficit-fighting mandate, has made clear that the ball is also in the Bank's court should further economic stimulus be required.

The Bank has not bought any assets under its quantitative easing program since February 2010, a time when the economy was picking up after a deep recession.

The head of Britain's fiscal watchdog said that growth will fall short of the 1.7 percent forecast in March, in comments that are likely to raise concerns about the government's ability to meet its debt-reduction goals.

But it is far from certain that another wave of gilt purchases -- which accounted for almost 99 percent of the Bank's first QE programme -- would have the desired effect.

Gilt yields have fallen to a series of record lows this week with 10-year bonds paying little more than 2.7 percent, a drop of more than 1 percentage point since mid-April.

Many economists believe the Bank will want to wait to see how the third quarter develops before making any policy change. It will publish updated quarterly growth and inflation forecasts next week that will give insight into its thinking.

Minutes to Thursday's meeting will not be published for two weeks.

(Reporting by Christina Fincher; Editing by Hugh Lawson, John Stonestreet)