Bank to keep rates steady and boost QE

By David Milliken

LONDON (Reuters) - The Bank of England looks likely to expand its 125 billion pound quantitative easing programme and keep interest rates at a rock-bottom 0.5 percent on Thursday to sustain its attempts to lift Britain out of recession.

The newly created money -- which the Bank has used to buy government bonds and corporate debt to encourage lending to the rest of the economy -- will all be spent in two weeks unless the Bank slows down asset purchases.

So economists expect the central bank to take the stop-gap measure of expanding the scheme by 25 billion pounds, which will allow asset purchases to continue through to next month's rate meeting, when policymakers will have a new set of quarterly economic forecasts to aid a longer-term decision.

"It is a nailed-on certainty that the Bank of England's Monetary Policy Committee will keep interest rates unchanged at a record low of 0.50 percent on Thursday," said Howard Archer, economist at IHS Global Insight.

"However, we believe that there is a very strong possibility that the MPC will expand the bank's Quantitative Easing programme by a further 25 billion pounds to 150 billion."

Britain's economy is no longer in the freefall that prompted the Bank of England to launch QE in March, but there is no clear sign of a recovery either.

Industrial output recorded an unexpected, sharp fall in May after a rising for the first time in over a year in April, while service sector measures are only consistent with anaemic growth.

Unemployment is at 7.2 percent of the workforce and rising, while modest signs that banks are starting to lend more freely have not changed the Bank's view that a credit shortage is still one of the biggest challenges to sustained growth.