On Air Now

Upcoming Shows

Program Schedule »

Listen

Listen Live Now » 1360 AM Northeast, WI 97.5 FM Green Bay, WI

Weather

Current Conditions(Green Bay,WI 54303)

More Weather »
58° Feels Like: 58°
Wind: NNW 0 mph Past 24 hrs - Precip: 0.06”
Current Radar for Zip

Tonight

Showers 48°

Tomorrow

Showers 66°

Tues Night

Partly Cloudy 37°

Alerts

BoE holds fire on rates but rise seen by May

By Christina Fincher

LONDON (Reuters) - The Bank of England defied critics and kept interest rates at a record low on Thursday, judging the threat from rising inflation will prove temporary and that Britain's recovery remains in doubt.

Inflation has jumped to almost twice the BoE's target and is still rising, but the economy faces headwinds from hefty public spending cuts and suffered a surprise contracted at the end of last year.

Strategists had been unanimous in predicting rates would stay at 0.5 percent -- where they have stood since March 2009 -- and there was little market reaction.

However, the debate on the BoE's monetary policy committee will have been heated and investors remain convinced that rates will rise before long. Money markets show a quarter-point rate rise is fully priced in by May, with at least one additional hike by the end of the year.

By May, BoE policymakers will have more information about how the economy weathered the government's fiscal tightening and whether a 0.5 percent contraction in the fourth quarter was largely related to unusually snowy weather.

James Knightley at ING said Thursday's policy deliberations would have been hard-fought.

"Despite our worries about the economy there is clearly growing pressure on the BoE to do something to combat near-term inflation fears," he said.

KEEPING THE FAITH

The BoE's decision to hold fire will come as a relief to the government, which is hoping loose monetary policy will cushion the blow from its fiscal tightening.

However, it will also heighten criticism that Britain's central bank is ignoring its price stability mandate. Inflation has been more than a percentage point above its 2 percent target for the past year and has been above target around 80 percent of the time for the past three years.

The BoE's no-change decision means quarterly inflation forecasts, to be published next Wednesday, are likely to show price pressures easing over the medium term. However, after repeated overshoots, the BoE's line that inflation will be temporary is wearing thin.

"If the Monetary Policy Committee again forecasts sub-target inflation two to three years ahead with market rates, investors may again be skeptical, doubting the MPC's inflation forecasts and hence also doubting their message," said Michael Saunders at Citi.

BoE Governor Mervyn King warned last month that inflation could rise as high as 5 percent in the coming months, but reiterated that slack in the economy should steer inflation back to target once one-off factors, such as last month's rise in sales tax, have faded.

Two other members of the BoE's monetary policy committee, Andrew Sentance and newcomer Martin Weale, are less confident however. Both voted for an immediate quarter-point interest rate rise in January and are likely to have repeated their call this month.

A breakdown of this month's vote will be published on February 23 and is likely to show sharp divisions.

"Although today's decision means the tail risk of an immediate rate hike did not crystallize, the question of whether there will be a tightening in policy over the next few months remains live," said Simon Hayes at Barclays Capital.

(Additional reporting by David Milliken and Fiona Shaikh; Editing by Ron Askew)

Comments