LONDON (AFP) — The Bank of England surprisingly decided against pumping billions of extra pounds into money markets to boost lending on Thursday, as it kept its key interest rate at a record-low 0.5 percent.
While the rate decision was widely expected, many economists believed the BoE's Monetary Policy Committee would announce plans to create an extra 25 billion pounds under its quantitative easing (QE) scheme.
"There was never any doubt that the Bank of England would keep interest rates down at 0.50 percent, but we admit that we are surprised that the MPC did not extend the quantitative easing programme by a further 25 billion pounds to the current 150 billion pounds ceiling," said Howard Archer, chief Britain economist at the IHS Global Insight consultancy.
"The MPC clearly felt that it could afford to 'wait and see' for another month before deciding whether or not to extend the QE programme."
The BoE's announcements after its latest two-day meeting comes amid recent data showing the economy shrank at its fastest pace in half a century during the first quarter.
The central bank had launched its QE programme in March, when it decided to pump out 75 billion pounds of newly-created money after slashing interest rates to 0.5 percent in a twin-pronged attack on the global credit crunch. In May, the BoE decided to create an additional 50 billion pounds.
Under QE -- a process effectively seen as printing new money -- the central bank buys government bonds from commercial banks in the hope that the institutions will lend once again to businesses and individuals.
Its decision Thursday not to increase the amount of new money gave a boost to sterling on foreign exchange markets. Minutes of its latest meeting will be published on July 22.
In a bid to kick-start lending amid the credit crunch and worst downturn since the 1930s, central banks worldwide have slashed borrowing costs to all-time lows. The Bank of England has cut interest rates from a level of 5.0 percent last October.
But rate-loosening alone was deemed insufficient policy by the BoE amid the credit crunch, hence the introduction of QE and similar programmes by the Federal Reserve and European Central Bank.
The country's recession is past its worst but talk of economic recovery is premature as unemployment is set to top three million in 2010, business grouping the British Chambers of Commerce had said Tuesday.
The BCC said it continued to predict unemployment would reach 3.2 million -- about 10 percent of the workforce -- by mid 2010.
Manufactured output meanwhile declined by 0.5 percent in May from April, official data showed on Tuesday. Analysts had expected a rise of 0.2 percent.
Recent data has however pointed to a stabilisation of the housing market after a slump in property prices over the past 18 months.
The recession-battered economy shrank 2.4 percent in the first three months of the year compared to the final quarter of 2008 -- the largest decrease since 1958.
Meanwhile, 12-month inflation is at its lowest level since the end of 2007 because of falling food and energy prices.
Consumer Prices Index (CPI) annual inflation, the government's target measure, slowed to 2.2 percent in May from 2.3 percent in April.
The BoE's key aim is to keep annual inflation close to a government-set target rate of 2.0 percent.
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