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Written by Jane Wardell, THE ASSOCIATED PRESS
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Sunday, 07 September 2008 |
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LONDON - The Bank of England kept its key interest rate unchanged at five per cent Thursday despite a possible domestic recession.
The central bank's decision was widely expected by economists given its mission to keep inflation at the government's two per cent target rather than to stimulate growth.
Inflation is currently running well above that level - at 4.4 per cent - due in part to imported high energy and food prices.
However, many economists expect interest rates to come down before the end of the year as inflationary pressures ease, paving the way for the bank to act on its concerns about the state of the economy.
Analysts will now be looking closely at the minutes of this month's meeting, which will provide details on the voting and the committee's thoughts on key economic indicators, when they are released on Sept. 17.
In the past two months, there has been a three-way split in the nine-member committee, with a majority of seven voting to keep rates steady and one member voting each way for a rise and a cut.
U.S.-based committee member David Blanchflower, who has voted for a quarter of a percentage point cut for the past three months, has been the most vocal about the downturn in the economy, saying that an extended and deep recession is possible unless interest rates are cut soon and by a significant amount.
"It seems unlikely that any MPC member will have yet joined David Blanchflower in voting for an interest rate cut, but if they have it will significantly boost the chances of lower interest rates before the end of the year," said Global Insight economist Howard Archer.
Blanchflower argues that without cuts, inflation will undershoot the target as prices fall, leaving policy makers with a deflationary headache.
"With a looming recession and the price of crude oil and commodities dropping substantially inflation should be tamed rapidly," said Clem Chambers, CEO of ADVFN, a financial Web site.
"This makes the prospect of a rate cut - or even cuts - very probable in the next couple of months as the sharp fall of sterling suggests."
The British currency earlier this week fell to an all-time low against the euro and a two-year low against the U.S. dollar after Treasury chief Alistair Darling warned that the country was facing the worst economic crisis in 60 years.
Darling's comments were viewed by many economists as foreshadowing a significant downward revision in the government's forecasts for GDP growth from the current 2.5 per cent for this year.
That prediction is a stark contrast to the revised 1.2 per cent growth forecast by the Organization for Economic Cooperation and Development on Tuesday. The OECD added that it expects the British economy to shrink 0.3 per cent in the third quarter and 0.4 per cent in the final quarter, taking it into recession.
The British government's own figures revealed that gross domestic product growth ground to a halt between April and June, ending more than 15 years of continuous expansion.
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Last Updated ( Sunday, 07 September 2008 )
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