Bank of England freezes record low interest rates again

LONDON: The Bank of England held interest rates Thursday at a record low, in contrast to the European Central Bank, as policymakers set aside inflation concerns and sought to shore up Britain's flagging recovery.

The BoE's monetary policy committee decided to hold its key lending rate at just 0.50 percent, where it has stood since March 2009, despite widespread fears that soaring inflation is squeezing households' spending power.

Shortly afterwards, the ECB ramped up eurozone interest rates by a quarter-point to 1.50 percent, the second such hike since April as it seeks to tame inflationary pressures.

Policymakers normally raise interest rates to combat high inflation but the BoE's hands have been tied by flat British economic growth, analysts said.

"The UK economy is in a fragile state and near the bottom of the GDP growth league table for the major economies," VTB Capital economist Neil MacKinnon said.

"The BoE simply cannot hike interest rates in my view, as this would just tip the economy back into recession and crush the housing market.

"Having said that, parts of the eurozone are in a worse state and the ECB's decision to raise rates again could turn out to be a major policy error given the threat of debt default and risks to the eurozone banking system."

The BoE said in a statement that it also decided against changing its stimulus programme, under which it has injected £200 billion (225 billion euros, $328 billion) into the economy.

Thursday's rate decisions were in line with market expectations. Minutes detailing the discussion from the BoE gathering will be published on July 20.

The ECB raised its benchmark lending rate to contain eurozone inflation that now stands at 2.7 percent, following a rate increase in April which was the first since July 2008.

British inflation is even higher, running at 4.5 percent on an annual basis, which is the highest level for more than two-and-a-half years.

That rate is also more than double the BoE's official target of 2.0 percent and has been propelled in recent months by soaring food and fuel prices.

The BoE is worried about other increasingly gloomy signals over the flagging economy, which has been partly dented by the coalition government's painful austerity measures.

Gross domestic product (GDP) grew by 0.5 percent in the first three months of this year. However, that left activity broadly flat over the past six months after a 0.5-percent contraction in the previous quarter.

"Economic frailty combined with the temporary nature of the current bout of inflation provides little rationale for raising rates at the moment," said economist Scott Corfe at the Centre for Economics and Business Research.

"Unless economic prospects in the UK showed a sharp improvement over the coming months which we think is very unlikely do not expect a rate rise until next year."

Since the last BoE meeting, several major High Street retailers have collapsed in the face of weak consumer demand, with home ware chain Habitat, department store TJ Hughes and fashion retailer Jane Norman now in administration.

Companies have also announced thousands of job cuts, including Lloyds Banking Group and Canadian manufacturer Bombardier.

Copyright AFP (Agence France-Presse), 2011