UPDATE 1-Bank of England keeps rates at 0.5 pct as expected

* BoE leaves rates at 0.5 pct, QE at 200 bln stg as expected

* Analysts cite falling inflation, risks to growth as reason

* Clues on future policy expected in August Inflation Report

(Adds quotes, details)

By David Milliken

LONDON, July 8 (BestGrowthStock) – The Bank of England’s Monetary
Policy Committee kept interest rates at a record low 0.5 percent
on Thursday, in an almost universally expected decision that
likely reflects policymakers’ concerns about the growth outlook.

All 61 economists polled by Reuters last week expected the
central bank to keep rates on hold, and the majority see no rate
rise this year despite last month’s surprise decision by one
policymaker to vote for rates to rise to 0.75 percent.

Although consumer price inflation of 3.4 percent is well
above the BoE’s 2 percent target, it has started to fall from
the 17-month high of 3.7 percent set in April. Many of the
factors that had pushed it higher — such as rising oil prices
and weaker sterling — have gone into reverse in the past month.

Moreover, policymakers also expect at least some downward
pressure on inflation from spare capacity in the economy, as
Britain recovers from its deepest recession since at least World
War Two, and output remains well below the peak hit in 2008.

Future growth is also likely to be slowed by a planned 25
percent cut in the spending of most government departments over
the next five years, as well as similar austerity measures in
many of Britain’s euro zone export markets.

The Bank’s updated quarterly inflation forecasts in August
will provide a further spur for debate, as they will factor in
the budget measures and an upcoming rise in value-added tax.

“The MPC will be very cautious over tightening until it is
reasonably sure that the downside risks facing growth are
largely neutralised,” said Philip Shaw, economist at Investec.

Industrial output data released earlier on Thursday showed
the strongest annual growth in almost a decade as manufacturers
bounced back from recession, but economists warned that this
rate of growth was not sustainable [ID:nAHL6IE63I].

The BoE has held interest rates at 0.5 percent since the
depths of the recession in March 2009, and as usual made no
statement alongside its rate decision. A voting breakdown will
only be available when the MPC minutes are published on July 21.

The BoE made no change to the 200 billion pounds ($304
billion) of assets, mostly British government bonds, purchased
with newly-created money under its quantitative easing scheme
between March 2009 and February 2010.

BoE Governor Mervyn King said last month that the central
bank would raise interest rates before it sold these assets.

LINGERING INFLATION CONCERN

Nonetheless, policymakers are not totally relaxed about
higher inflation.

One MPC member, Andrew Sentance, had already voted to raise
rates in June due to concerns about persistently above-target
inflation.

His colleague Adam Posen said last week that public
inflation expectations were edging up — though not by enough
for him to discount the countervailing risk of recession
[ID:nLDE65T0KR].

Minutes of June’s MPC meeting showed a group of policymakers
other than Sentance had doubts — which King does not appear to
share — about how much of a downward impact on inflation
economic spare capacity will have [ID:nLDE65M0SE].

“There’s clearly more active discussion currently on the
Committee on the appropriate policy stance,” said David Tinsley,
an economist at National Australia Bank.

“Some members (are) concerned about the effect of inflation
being so far above target on an ongoing basis, while others are
still heavily focused on the slack in the economy and the need
to see balance sheet adjustments from the banking, public and
household sectors.”
(Additional reporting by Fiona Shaikh and Christina Fincher;
editing by Mike Peacock)

UPDATE 1-Bank of England keeps rates at 0.5 pct as expected