LONDON (AFP) - The Bank of England is expected to keep its key lending rate at a record low 0.5 percent and decide against creating more new money when it meets Thursday as the economy improves, analysts said.
After last month's shock decision to pump an extra 50 billion pounds of new money into the economy to encourage bank lending, the BoE's monetary policy committee (MPC) will likely sit tight this time around.
"We see virtually no chance that the MPC will move the policy rate either way at the upcoming meeting. Nor do we expect the committee to change this month the QE (quantitative easing) target from the 175-billion-pound level agreed in August," said Citi banking group analyst Michael Saunders.
Under quantitative easing, the bank has created money by buying bonds from commercial institutions.
"With the economy improving, we doubt the governor's vote to expand QE to 200 billion pounds will gain more support this month than in August," Saunders added.
At last month's meeting, Bank of England Governor Mervyn King wanted to pump more new money into the economy than the amount his colleagues eventually agreed upon.
King and two other BoE policymakers wanted the central bank to increase its so-called quantitative easing (QE) programme by 75 billion pounds, according to the minutes of a the August meeting.
However, their plan was thwarted as the MPC's six other members voted instead to increase QE by only 50 billion pounds, to a total of 175 billion pounds.
"We suspect that divisions will remain within the MPC (when it meets this week) on whether or not to extend QE, and to what extent," said Howard Archer, chief Britain economist at the IHS Global Insight consultancy.
"While we do not expect any change in QE this month, we certainly would not rule out an eventual further extension. The key factor is likely to be whether or not there are growing signs that bank lending is picking up, as this is vital to sustainable recovery prospects.
"What is much clearer is that interest rates will remain at 0.50 percent for some considerable time to come. Indeed, we do not expect any rises until at least the latter months of 2010," added Archer.
The BoE launched the QE policy in March, when it also slashed borrowing costs to their current historic low level, as policymakers sought to prevent the British economy sliding further into a painful recession.
The BoE has since ramped up its QE scheme to encourage commercial banks to lend to businesses and individuals, such as those seeking mortgages.
Banks remain reluctant to lend because they want to build up their capital reserves, which have been savaged by the soaring bad debts caused by the global financial crisis.
While France, Germany and Japan have all emerged from recession, Britain remains stuck with shrinking economic growth as the number of unemployed people in the country rises towards three million.
Gross domestic product (GDP) contracted 0.7 percent in the second quarter of 2009 compared with the first three months of the year, in the fifth quarterly drop in a row, according to recent official data.
That was a modest improvement on the previous estimate of a 0.8-percent contraction.
The BoE's main task is to use monetary policy to try and keep annual inflation close to a government-set target of 2.0 percent.
The BoE recently forecast that the rate of 12-month inflation was set to fall under 1.0 percent this year as the economy makes a slow recovery from recession.
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