LONDON (Reuters) - The Bank of England kept interest rates at a record low on Thursday, springing no surprises as growing signs of economic weakness at home and abroad outweighed concern about above-target inflation.
The central bank’s decision means that rates will stay at 0.5 percent for a 27th consecutive month, and most economists do not expect rates to rise until the end of the year.
The Bank is taking a gamble that drags on growth from government spending cuts and a possible weakening in overseas demand will prove to be more persistent than upward pressures on inflation from rising commodity prices.
“For now at least most committee members are prepared to hold fire on interest rates to give the economy more of a chance to develop forward momentum,” said IHS Global Insight economist Howard Archer.
“We expect the Bank of England to hold fire on interest rates until at least November, and we believe that there is now a very real and increasing likelihood that the MPC will not act until 2012.”
Money markets only fully price in a rate rise for May 2012 — a sharp reversal from bets on a May 2011 rate rise which were widespread three months ago.
Inflation is running at 4.5 percent and higher utility bills are likely to push it to 5 percent later this year, but the Bank forecast last month that it will fall back to target by early 2013 even if rates stay on hold for most of this year.
Economic output has essentially flatlined over the last three months of 2010 and the first three of 2011.
Economists expect Bank minutes on June 22 to show a 7-2 split in favour of keeping rates on hold.
BoE chief economist Spencer Dale and external member Martin Weale are likely to have stuck with their call to raise rates by 25 basis points. But new MPC member Ben Broadbent — who replaces arch-hawk Andrew Sentance — is not expected to follow his predecessor’s rate hike call.
Data earlier on Thursday showed Britain had a smaller than expected trade deficit in April, revealing that some of the economic rebalancing the Bank has called for since the financial crisis is taking place — albeit more through a drop in imports than a rise in exports.
Britain’s biggest household goods retailer, Home Retail Group, said sales at its Argos stores fell by 10 percent in the past three months as fearful shoppers stopped purchases of electrical goods.
Government spending cuts aimed at largely eliminating a budget deficit of 10 percent of GDP over the next four years are starting to take effect, making Britain more reliant on overseas demand.
But strong growth may prove difficult to achieve as surveys over the past month have shown weaker activity in manufacturing and services not just in Britain but also in the United States and the euro zone.
UK industrial output numbers out on Friday are set to make grim reading, even if part of the weakness of that will be due to an extra public holiday in April to mark the royal wedding.
Reporting by David Milliken, editing by Mike Peacock