Rates on hold as Bank mulls pumping more money into economy

THE likelihood of an interest rate rise later this year receded yesterday after Bank of England monetary policy committee minutes highlighted hardening sentiment against a hike.

The MPC voted 7-2 to keep rates at historic lows of 0.5 per cent, a retreat from three committee members voting for a rise last month.

In addition, some MPC members raised the possibility of further quantitative easing on top of the BoE's existing 200 billion bond purchase programme from the banks to help promote economic growth.

Yesterday's committee vote was seen as easing the pressure on businesses and homeowners for the second half of 2011.

New committee member Ben Broadbent voted with the majority to freeze rates, declining to follow the lead of his predecessor, Andrew Sentance, in calling for monetary tightening.

City analysts said the vote and the willingness to consider more quantitative easing at the 8-9 June MPC meeting indicated that the BoE was still more concerned about the fragility of Britain's recovery than growing inflationary pressures.

The MPC minutes said: "For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised."

There has been no increase in interest rates since March 2009, and no added quantitative easing since February 2010.

The signs that rates were likely to be on hold for some time and that further quantitative easing was possible saw the pound down 0.8 per cent at $1.61 in late trading. The euro was up 0.7 per cent at 89.32p.

Philip Shaw, an economist with Investec, said: "This could broaden the debate on monetary policy from being simply a discussion of the timing of the first rate increase to include the possibility of more asset purchases."

Under quantitative easing the BoE electronically "prints" new money to buy bonds from banks to give the banks more lending power to the economy.

The BoE minutes said most MPC members believed weak economic growth was likely to last longer than previously thought - particularly if the Greek financial crisis escalated.

BoE chief economist Spencer Dale and fellow MPC member Martin Weale continued to vote for a 0.25 per cent rise in rates, although both accepted that forward-looking data on growth had been weak over the past month. Member Adam Posen maintained his vote for an immediate extra 50bn of quantitative easing.

Sir Mervyn King, Governor of the BoE, warned last week that the financial crisis of 2008-9 had triggered "seven lean years" that Britain was only halfway through.