BoE to keep policy on hold as inflation proves sticky

LONDON Fri Nov 30, 2012 5:24pm GMT

Busses pass the Bank of England in the city of London November 26, 2012. REUTERS/Olivia Harris

Busses pass the Bank of England in the city of London November 26, 2012.

Credit: Reuters/Olivia Harris

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LONDON (Reuters) - The Bank of England looks almost certain to leave policy unchanged next week, a month after pausing its 375 billion pound programme of bond purchases, as sticky inflation outweighs concerns about a sluggish economy.

The BoE voted 8-1 against a further expansion to its programme of quantitative easing last month, and none of the 62 economists polled by Reuters this week see a policy change after the Monetary Policy Committee's monthly meeting ends on December 6.

Interest rates are also expected to remain at their record low 0.5 percent for the foreseeable future. <BOE/INT>

"They seem drawn to the view that the economy can't grow that quickly without generating inflation," said Simon Hayes, chief UK economist at Barclays. "Continually inflation has been stronger than expected, and that's making them reluctant to do more QE at the moment."

Finance minister George Osborne's fiscal statement on December 5 is not seen as a big factor for the MPC's decision, as it is unlikely to alter the thrust of the government's austerity plans, even if there is further slippage in the timetable for deficit reduction.

Inflation jumped by its biggest margin in more than a year in October to hit a five-month high of 2.7 percent, breaking an otherwise fairly steady decline towards its 2 percent target from the three-year high of 5.2 percent hit in September 2011.

Since the MPC met at the start of October, economic growth in the third quarter of 2011 has been confirmed at a robust 1.0 percent. But this largely represents a technical rebound after three quarters of recession, and BoE Governor Mervyn King has since warned of the risk of another dip in the fourth quarter.

MIXED DATA

Economic news so far has been mixed, with tepid lending figures but better than expected GfK consumer confidence and CBI retail numbers.

The picture will become clearer next week, with the release of November purchasing managers' surveys and the first data on the success of the BoE's Funding for Lending Scheme, which aims to improve borrowing conditions for households and businesses.

"A further decline in the services PMI on Wednesday ... could bring about a collective jolt of nerves over the economic outlook and a decision to resume asset purchases. But failing this, the more likely outturn is another no change," said Investec economist Philip Shaw.

Economists are more evenly split on whether the BoE will restart asset purchases next year, with about 40 percent thinking this likely.

King and his deputy governor Charlie Bean have both left the door open to future asset purchases in statements this week, while one MPC member, Paul Fisher, told a parliament committee that the economy might well need more stimulus early next year.

Analysts were also surprised when Ben Broadbent - whom most place at the more hawkish end of the MPC - said he had mulled further stimulus in November. But he was put off by October's inflation, and a government decision to take back some 35 billion pounds of gilt coupons paid to the BoE.

In the longer term, however, the future of the BoE's asset purchases will lie in the hands of King's successor, Bank of Canada governor Mark Carney.

King retires at the end of June, and Osborne announced on Monday that Carney would succeed him - which Investec's Shaw said might herald a marked shift in approach to supporting Britain's economy and tackling inflation.

(Editing by Toby Chopra)

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