BOE refrains from expanding stimulus as recovery assessed

The Bank of England left its stimulus program unchanged as officials assess recent signs of strength in the economy after it returned to growth in the first quarter.

Armed with new quarterly forecasts, the nine-member Monetary Policy Committee kept the target for asset purchases at 375 billion pounds ($584 billion), as forecast by all but one of 44 economists in a Bloomberg News survey. The decision followed BOE Governor Mervyn King’s penultimate meeting before he is replaced by Bank of Canada chief Mark Carney on July 1.

Some surveys suggest the recovery is building momentum after the economy grew in the first quarter, and the National Institute for Economic and Social Research estimated today that gross domestic product rose 0.8% in the three months through April. Still, strains in the euro area that prompted a European Central Bank interest-rate cut last week might support the case for further stimulus.

“The U.K. data flow over the past month has been pretty good,” said James Knightley, an economist at ING Bank NV in London. “We still feel that the recovery will be slow and the U.K. remains vulnerable to external shocks, particularly from the euro zone, so there is the potential for further stimulus.”

A report earlier showed U.K. industrial production increased 0.7% in March, more than economists predicted. Manufacturing rose 1.1%, also exceeding forecasts.

The pound slipped 0.2% to $1.5506 as of 3:37 p.m London time, having earlier risen as much as 0.4%. The yield on the 10-year gilt was little changed at 1.77%.

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The central bank also kept its key interest rate at a record low of 0.5%, which was forecast by all 52 economists in a separate poll. Minutes of the meeting, showing how officials voted, will be published May 22.

The British Chambers of Commerce said the BOE was right not to expand stimulus again and that it should use other measures to support business lending.

“Adding to QE would only provide marginal benefits for the economy, while increasing the risks of higher inflation and bubbles,” BCC Chief Economist David Kern said in a statement.

King and Markets Director Paul Fisher had voted for a 25 billion-pound increase since February, joining David Miles in a push for more quantitative easing.

Since then, the economy has shown some signs of strength. Activity at services businesses improved in April, while slumps in manufacturing and construction eased, according to surveys last week. The FTSE 100 Index has risen 12% this year and reached its highest in more than five years today.

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