Bank of England set to sit tight

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BankofEngland1 Reuters.

London - The Bank of England is again set to leave its key interest rate at a record low of 0.50 percent Thursday after it launched measures to cool Britain's housing market.

The BoE is forecast also to leave its level of cash stimulus, or quantitative easing, pumping around the economy at £375 billion ($642 billion, 472 billion euros).

This week's meeting of the bank's Monetary Policy Committee (MPC) “seems unlikely to be a major step towards higher interest rates”, said Samuel Tombs, senior economist at Capital Economics consultants.

“We suspect that the vote to leave (the rate) on hold will be unanimous once again. And while a rate hike before the end of the year cannot be ruled out if the recovery accelerates, the likely weakness of inflation means that there is a good chance the MPC sits on its hands until early 2015.”

Consumer prices have been sliding in Britain, with 12-month inflation slowing to 1.5 percent in May - the lowest level for four and a half years.

The central bank is therefore having to deal with inflation that is below its 2.0 percent target, and a housing market that has rallied over the past year, especially in London.

Mindful also that it has to ensure that Britain's growth revival keeps going, the central bank has so far shied away from raising rates to prevent a property bubble from forming.

Rather, it has deployed other tools at its disposal to deal with the rising housing prices.

Meanwhile, the market has been pricing in future rate hikes, resulting in gains for the British pound, which last week hit multi-year highs against the dollar.

Official data on Tuesday though dampened those expectations and pushed the sterling lower against rival currencies.

Industrial output across Britain surprisingly slid in May, the Office for National Statistics said, while analysts had expected expanding output for the month.

BoE governor Mark Carney last month hinted that the bank could lift rates sooner than expected, prompting analysts to price in an increase by the end of the year.

The bank's main lending rate has been locked in at 0.50 percent for more than five years, but amid signs that Britain's housing market could face a fresh price bubble, the BoE last month announced a cap on lending for home loans.

The bank's Financial Policy Committee recommended that property loans of 4.5 times a borrower's income or higher should comprise no more than 15 percent of new mortgages, with effect from October.

While the BoE held firm on rates in June, the European Central Bank launched radical and unprecedented easing measures to bolster fragile eurozone growth and ward off the threat of deflation.

The United Kingdom is a member of the European Union but not the bloc of countries that shares the euro. - Sapa-AFP


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