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BoE holds rates despite recovery

Thursday, May 08 14:11:16

The Bank of England kept interest rates at a record low today but the strong pace of Britain's economic recovery and a surge in house prices is likely to lead to a split among policymakers soon.

As expected, the Bank's Monetary Policy Committee left its benchmark interest rate at 0.5 percent where it has sat since the depths of the financial crisis more than five years ago.

The MPC made no statement and a breakdown of how its nine members voted is only due on May 21.

Disagreement over when the bank should raise rates may already be brewing, economists said, as output looks set to expand by about 3 percent this year and concerns are growing about a possible housing bubble.

"Against this background, it would not be a total shock if some Committee members have started seriously to consider a tightening of policy, if not actually voting for one," said Jonathan Loynes, chief European economist at Capital Economics.

If the BoE does raise rates within the next 12 months, as many economists expect, it would likely make Britain the largest advanced economy to tighten policy since the financial crisis, as no move seems close in the United States, euro zone or Japan.

Of the nine MPC members, Martin Weale has sounded most concerned about the risk of inflation picking up, even though it recently touched a four-year low.

Complicating the picture is a reshuffle at the BoE which means three new rate-setters will join the MPC in the coming months, starting with Andy Haldane. He is currently in charge of looking for risks to the economy from the banking sector, and is due to swap roles with chief economist Spencer Dale in June.

The BoE is due to announce a new set of quarterly economic forecasts at 0930 GMT next Wednesday when Governor Mark Carney will hold a news conference.

Investors will be watching for its latest assessment of how quickly the spare capacity in the economy is being run down, something which could push up inflation.

Simon Wells, an economist at HSBC, said a big question was whether the bank would show any concerns about the apparent lack of growth in British productivity, something it had been counting on once demand started to bounce back.

"Recall that the MPC expect a cyclical recovery in productivity, which is a key reason it feels comfortable keeping rates on hold," he said. (Reuters)