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Bank of England sits tight on interest rate

LONDON: The Bank of England on Thursday voted to keep its main interest rate at 0.50 percent against a backdrop of sliding British inflation.

The BoE, holding its first policy meeting of the year, decided also to keep the level of its quantitative easing (QE) cash stimulus pumping around the economy at £375 billion ($565 billion, 480 billion euros), the bank said in a statement.

“The Bank of England’s Monetary Policy Committee at its meeting today voted to maintain Bank Rate at 0.5 percent,” it said.

Reasons for the MPC’s decisions will be set out in the meeting’s minutes to be published on January 21.

“As fully expected the Bank of England kicked off 2015 by keeping interest rates down at 0.50 percent,” said Howard Archer, chief UK economist at the IHS Global Insight research group.

“It would currently be a major surprise if the Bank of England raised interest rates before the final months of this year given the current disinflationary impact of very low oil prices and the risk that UK growth could be hampered by mounting political uncertainty ahead of May’s general election and problems in the eurozone,” he added.

Inflation in Germany, Europe’s biggest economy, hit a five-year low in December, data showed this week, turning up the heat on the European Central Bank to do more to ward off the threat of deflation, or falling prices, in the eurozone.

Inflation is sliding also in Britain, with the annual rate reaching a 12-year low point of 1.0 percent in November.

Meanwhile ahead of Britain’s general election due in May, the country’s economic growth has shown signs of cooling.

Britain, though not a member of the eurozone, counts the neighbouring bloc as its biggest trading partner.

“With the recovery showing signs of frailty and the chances of deflation growing, the MPC is under little immediate pressure to raise interest rates,” noted Samuel Tombs, senior UK economist at Capital Economics consultants.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns already persuaded the ECB to cut interest rates to a new all-time low and roll out other anti-deflation measures such as a series of asset purchase programmes to inject cash into the economy.

Consumer prices dropped by 0.2 percent in December in the eurozone, the first time inflation has been in negative territory since October 2009 amid the financial crisis.

The ECB may now have to resort to even more radical measures, such as QE, the large-scale purchase of sovereign bonds that has been carried out by the Bank of England. -AFP

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