Bank of England on hold for now, more stimulus on the cards

LONDON Thu Oct 4, 2012 12:30pm BST

A woman carries a shopping bag decorated with a Union flag past the columns of the Bank of England in the City of London, July 3, 2012. REUTERS/Andrew Winning

A woman carries a shopping bag decorated with a Union flag past the columns of the Bank of England in the City of London, July 3, 2012.

Credit: Reuters/Andrew Winning

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LONDON (Reuters) - The Bank of England shied away from stepping up its programme of government bond buying on Thursday, as the economy is showing signs of growth and new schemes to boost credit may yet spur lending.

Britain probably exited recession in the third quarter as production bounced back from the effect of an extra public holiday in June and ticket sales for the London Olympics and Paralympics boosted growth.

Still, another cash injection later this year remains a safe bet in the eyes of many economists because the recovery looks feeble, government spending cuts continue to weigh, and the dangers from the unresolved euro zone crisis loom large.

"Pressure for immediate further stimulative action has been eased by the economy recently showing signs of modest underlying growth," said Howard Archer, economist at IHS Global Insight.

"With any recovery currently looking feeble and fragile, we expect the Monetary Policy Committee to decide to give the economy a further helping hand in November," he added.

After its two-day meeting, the Monetary Policy Committee made no change to its current plan to buy 50 billion pounds of British government bonds, which will take its total purchases to 375 billion pounds by November.

The central bank also left its interest rate unchanged at the record low of 0.5 percent, in line with a Reuters poll of economists, who had bet on unchanged policy.

Sterling inched up after the BoE announcement, while gilts showed little reaction.

SPLIT

Britain has not fully recovered the output lost during the 2008-2009 slump, which has left many Britons worse off, and the country fell back into recession late last year.

In another sign that the economy was likely to show some growth, British car sales rose by 8.2 percent in September, nearly twice the annual rate seen so far this year.

"Although the economic outlook remains challenging, we are starting to see a tentative return of consumer confidence," said the chief executive of car lobby SMMT, Paul Everitt.

But mortgage lender Halifax reported a drop in house prices in September, providing a reminder that a sustained recovery was still far from certain.

A slew of weak business surveys have highlighted the fragility of the economy, and the Funding for Lending scheme to get credit flowing has yet to prove its worth.

And the government has little room to provide a meaningful boost to the economy because it is struggling to reduce the country's huge budget deficit despite its tough austerity plan.

So most economists expect another dose of stimulus in November, although the decision may not be unanimous.

"Some members - Spencer Dale, Ben Broadbent and Martin Weale, in our view - are closer to our hawkish view on inflation, and we think their lack of enthusiasm for doing more is likely to be clear again," said Nomura economist Philip Rush.

"However, we still doubt they will 'win the debate' and block the committee from announcing more QE in November," he said.

The central bank will not disclose the discussions until the release of the minutes of the meeting on October 17.

New growth and inflation forecasts in November's quarterly inflation report will help policymakers decide whether more economic stimulus is needed.

The BoE rate-setters will also watch closely if the European Central Bank's pledge to buy Spanish and Italian government bonds to calm the euro zone turmoil will help stabilise Britain's largest export market and the banking industry.

(Reporting by Sven Egenter and David Milliken; Editing by Hugh Lawson)

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