Bank of England freezes record-low interest rate

LONDON (AFP) - The Bank of England froze its key interest rate at a record low level on Thursday and held to credit-easing plans while waiting to see if the economy builds on signs of recovery from recession.

The announcement, in line with market expectations, left economists pondering the next step after Australia became this week the first advanced economy to raise rates since the global financial crisis.

In a separate move on Thursday, the European Central Bank also froze its main eurozone interest rate at a historic low level of 1.0 percent as it too battles a deep downturn in the 16-nation economic bloc.

"The Bank of England's Monetary Policy Committee (MPC) today voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent," the BoE said in a statement after a two-day meeting.

"The committee also voted to continue with its programme of asset purchases totalling 175 billion pounds (194 billion euros, 287 billion dollars) financed by the issuance of central bank reserves."

It added that the so-called quantitative easing (QE) programme would take another month to complete, while the scale of the plans were being kept under review.

"The MPC remains in 'wait-and-see' mode for now," said IHS Global Insight economist Howard Archer, adding that policymakers would wait until the BoE's quarterly economic forecasts, due next month, before deciding whether to change stance.

The BoE had in March slashed British borrowing costs to the current record low level and launched the radical QE policy in a bid to lift Britain out of recession.

Under QE, the bank creates money by purchasing bonds from commercial institutions in the hope of boosting lending to businesses and individuals.

The British central bank's nine-member MPC also wants to wait until the completion of its 175-billion-pound QE programme before deciding the next step, according to economists.

"Clearly the focus will soon shift towards next month's meeting by which time the committee will have the benefit of a set of new forecasts, and the BoE will have met the current QE target," said Investec economist Philip Shaw.

Arek Ohanissian, an economist at the centre for economics and business research (cebr), an independent consultancy, predicted that QE would be expanded in the coming months to aid a fragile economic recovery.

"Our view is that it will do so in an effort to provide further stimulus to a weak recovery," said Ohanissian.

Britain's economy shrank by 0.6 percent in the second quarter compared with activity in the first three months of 2009, which was better than the previous estimate of minus 0.7 percent, recent data showed.

That was the second upgrade to the forecast since July -- but it was still the fifth quarterly contraction in a row amid soaring unemployment.

For further insight into this week's BoE decision, traders must wait until October 21 when minutes from the meeting will be published.

Earlier this week, Australia became the first advanced economy to raise interest rates since the global financial crisis and promised more rises to come.

"We note that the Reserve Bank of Australia (RBA) this week became the first major central bank to tighten policy during the current cycle, much as it was in late-2003," added Investec analyst Shaw.

"The RBA's move brings into focus our view that the MPC could tighten early next year, all being well with the economy."

The RBA announced a rise of 25 basis points to 3.25 percent, lifting rates off a 49-year low after an aggressive round of cuts credited with helping fight off the worst global downturn in decades.