* UK central bank decides not to restart stimulus plan
* Prime Minister Cameron urges BoE to support recovery
* Sterling jumps on BoE decision
By David Milliken and Andrew Osborn
LONDON, March 7 (Reuters) - The Bank of England held fire on more economic stimulus on Thursday as Prime Minister David Cameron, pledging to keep cutting the deficit, called on it to prop up growth.
Economists had been split on whether the central bank would resume its main stimulus programme of buying government bonds after signs that the British economy is at risk of sliding into its third recession since the financial crisis.
Sterling jumped from a near 2-1/2 year low against the dollar after the bank’s decision.
Defending his austerity strategy against critics who argue too much belt-tightening is killing off growth, Cameron said the government had to curb spending and borrowing.
“We will not be able to build a sustainable recovery with long-term growth ... unless we fix this fundamental problem of excessive government spending and borrowing that undermines our whole economy,” he told an audience in Yorkshire, England.
“The Bank of England must support the recovery without putting financial stability at risk.”
The votes for more bond-buying, or quantitative easing, by the bank, were not there, however. The latest data does not yet point squarely towards recession, inflation is forecast to remain above the bank’s 2 percent target until 2016, and some at the bank doubt bond purchases are the best way to help.
Last month, three BoE policymakers including Governor Mervyn King voted for more bond purchases, a surprise rift which revived expectations of more stimulus.
The central bank, as usual, gave no statement to explain its decision on Thursday to hold off from more stimulus this month. So how close it is to changing its stance will not become clear until it publishes voting records on March 20, the same day finance minister George Osborne delivers his latest budget.
There has been speculation that Osborne may use the budget announcement to tweak the central bank’s inflation-fighting remit to focus more on growth, given the limited room he has for increased public spending.
Broader change could be afoot with the arrival of new governor Mark Carney in July. Carney, who is currently the head of the Bank of Canada, has said he wants to discuss possible changes that could put more emphasis on pursuing growth.
Analysts said the BoE was already adopting a flexible interpretation of its remit to target inflation at 2 percent on a two-year horizon - so tweaks to the wording in the budget may make little difference in practice.
“We hold the view that there will not be further asset purchases for now, but it is likely that the speculation about the monetary policy stance will continue,” said RBC economist Jens Larsen, who formerly worked at the central bank.
While economists did not view Cameron’s comments as a direct hint to the independent central bank to take immediate action, many still expect policy stimulus sooner rather than later.
“We continue to expect that the MPC will resume QE soon,” said Michael Saunders, UK economist at Citi. “Real and nominal GDP growth are weak, while a range of business surveys confirm that the economy remains sluggish.”
Cameron’s speech came after signs that his business minister Vince Cable, a member of the more left-wing Liberal Democrats, is having doubts about the merits of strict austerity.
In a newspaper column, Cable noted financial markets were calmer than when the coalition came to power in 2010 with a budget deficit of 11 percent of GDP. He said Britain may be able to afford to borrow more to invest in infrastructure - a view partly shared by the International Monetary Fund.
The pound has weakened by around 6 percent so far this year, hurt by suggestions from Bank of England officials that further depreciation may be needed to reduce the trade deficit, as well as their tolerance for above-target inflation in coming years.
The fall is similar to that of the yen which has weakened as Japan readies further measures to revive its economy. The U.S. Federal Reserve is deep in an open-ended bond-buying programme.
For the Bank of England, the question is whether further asset purchases are the best way to boost an economy battered by the euro zone debt crisis and falling real wages as well as government austerity.
The British Chambers of Commerce downgraded its growth forecasts on Thursday and said fiscal policy, including measures to support business investment, would be more effective.
Policymakers believe that QE still has some mileage left. Deputy governor Paul Tucker, who did not vote for more bond-buying in February, said last week that “nobody on the committee thinks that QE has reached the end of the road”.
He also floated other ideas, including charging banks to park their money at the central bank to encourage them to lend more and a scheme to boost firms’ access to working capital.