Inflation-wary Bank of England switches off money press

LONDON Thu May 10, 2012 1:00pm BST

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LONDON (Reuters) - The Bank of England voted on Thursday not to give Britain's struggling economy another injection of cash as concerns over stubbornly high inflation outweighed the risk of a prolonged recession and renewed dangers from the euro zone debt crisis.

Stopping its quantitative easing asset purchases, or QE, may make life more difficult for Britain's Conservative-led ruling coalition, which was battered in local elections last week and relies on loose monetary policy to soften the pain of austerity measures aimed at cutting huge public borrowing.

Britain's economy has not fully recovered from the slump caused by the 2007-2009 financial crisis, which left many Britons poorer as meagre wage increases have been eaten up by rising prices and government tax hikes.

But after buying 325 billion pounds of government debt with newly created money, 50 billion pounds of which has been bought in the last three months, the Bank has judged that its policy stance is supportive enough for now.

Sterling surged to near a 3-1/2-year high against the euro and gilts extended their losses, far underperforming German government debt.

The central bank also left its key interest rate unchanged at a record low 0.5 percent. Both decisions had been widely expected, though a significant minority of economists still think the central bank may eventually do more.

"With economic conditions subdued, and signs of euro area tensions building again, another round of QE cannot be ruled out," said Ian McCafferty from business lobby CBI. "But we expect the recovery to be on a firmer footing in the second half of the year as inflation eases and the global economy strengthens," he said.

SPLIT VOTE?

The central bank did not issue a statement to explain the decision, which was based on updated growth and inflation forecasts that Bank of England Governor Mervyn King will announce next week.

"The vote itself was likely closer than the surveys suggest with two, possibly three members voting for extra stimulus," said ING economist James Knightley.

Minutes showing the vote breakdown from the May meeting will be published on May 23.

Policymakers, most prominently BoE deputy governor Paul Tucker, have indicated that inflation may not fall below the Bank's 2 percent target as soon as forecast. Inflation rose for the first time in six months in March, touching 3.5 percent, the highest rate among the Group of Seven major advanced economies.

The minutes of the Monetary Policy Committee's (MPC) April meeting showed that inflation worries had become more dominant, and that long-standing quantitative easing advocate Adam Posen had dropped his vote for more QE.

King has also said the economy looks set to recover slowly and steadily later this year although inflation is too high.

The economy shrank 0.2 percent in the first three months of 2012, putting Britain officially back into recession, while previously upbeat business surveys have shown slower growth.

However, an unexpectedly strong rebound in manufacturing output in March provided some indication that the economy was a bit healthier, though overall industrial production was dragged down by a plunge in oil and gas extraction.

The OECD think tank's leading indicator also showed that Britain's economy was reaching a turning point for the better.

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