Thursday, July 5, 2012

Bank of England keeps rate steady, boosts bond buying

    The Bank of England maintained its official bank rate at 0.5 percent but boosted the size of its bond purchase program by 50 billion pounds to 375 billion, as widely expected.
    The BoE's Monetary Policy Committee said the combination of its recent, and prospective, expansion of lending schemes to ease tight liquidity in the banking system and continued stimulus from past policy measures should help the economy gradually strengthen.
    "But against the background of continuing tight credit conditions and fiscal consolidation, the increased drag from the heightened tensions within the euro area meant that, without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term," the bank said in a statement.

    The UK economy has barely expanded for the last 1-1/2 years and is estimated to have contracted in the last six months. Indicators point to continued UK and foreign weakness and despite recent progress by European politicians in addressing structural problems, confidence remains weak.
      "The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent," the bank said, noting the recent decline in inflation to an annual rate of 2.8 percent in May and declining commodity prices.
    "Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term," the bank said. The BoE targets inflation of 2.0 percent and inflation has been above that target since December 2009.
    The BoE last cut its rate to the current 0.5 percent by 50 basis points in March 2009, when it also began purchasing bonds to keep interest rates low and add funds to the UK economy. In February the size of the asset purchase program was raised by 50 billion pounds to 325 billion.


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