Bank of England holds key rate steady (Maintains size of quantitative easing program)

MarketWatch ^ | Jul 9, 2009 | William L. Watts

[AngieGal]

The Bank of England surprised financial markets and economists Thursday, after opting not to expand its 125 billion pound ($202 billion) quantitative-easing program at its July meeting as it kept interest rates at a record low of 0.5%.

-snip-

The British pound jumped sharply in the immediate wake of the move and held gains afterwards, rising 1.1% to $1.6233 versus the dollar. British government bonds, known as gilts, fell after the decision.

The committee didn't rule out an expansion of the program in the future, however.

-snip-

Despite signs the recession has moderated its pace, BOE officials, including Governor Mervyn King, have made clear the U.K. outlook remains fragile, economists said.

Concerns were underlined earlier this week when data showed that industrial production fell unexpectedly in May.

Unemployment continues to rise. And money-supply growth and lending were both relatively subdued in May.

While economists think second-quarter British GDP could eke out a bit of growth, the downturn was deeper than initially thought in the first quarter of the year.

The Office for National Statistics revised down its first-quarter data to show a 2.4% quarterly drop in the first three months of the year, compared to an earlier estimate of 1.9% decline. See full story.

"While in many respects this is old news and matters have moved on appreciably, it nevertheless means that the negative output gap is bigger than previously thought, which will further reduce inflationary pressures," said Howard Archer, chief U.K. and European economist at Global Insight, in a research note earlier this week.

That was likely to back up policy maker's expectations inflation would remain below the bank's 2% target over its two-year horizon, while suggesting that recent improvements in activity represent a bounce from an even weaker base, he said.