* 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 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)