UK keeps rate low despite recession threat
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LONDON, Feb 7 AFP
February 08 2013, 04:07AM
The Bank of England has voted to freeze its key interest rate at a record-low 0.5 per cent and maintain the level of its quantitative easing (QE) cash stimulus, despite the threat of a triple-dip recession in Britain.
The central bank said in an unexpectedly long statement that its Monetary Policy Committee (MPC) had voted to maintain its emergency QE stimulus at STG375 billion ($A572 billion).
The BoE said overall economic activity in Britain had been "broadly flat" over the past year, despite worries that the economy could be heading for the third recession in five years.
The stimulus has been used to try and help boost economic output, which unexpectedly shrank by 0.3 per cent in the final quarter of 2012. However, the economy flatlined over the entire year with zero growth.
Across in Frankfurt, the European Central Bank also opted to maintain its main interest rate at a record-low level of 0.75 per cent, amid ongoing debt strains in the crisis-hit eurozone.
The central bank said 12-month inflation would rise further in the near-term and could remain above its two per cent target for the next two years. However, it was then forecast to return to "around" the target as price pressures fade.
Policymakers also mulled withdrawing QE stimulus, to pull inflation lower, but decided it would risk endangering any recovery. QE can risk stoking inflation as it is tantamount to printing money.
Thursday's decisions were in line with expectations and came as incoming BoE governor Mark Carney called for the bank to ready plans for a smooth eventual withdrawal of QE stimulus to avoid major disruption on markets.
Canadian central bank chief Carney - who succeeds BoE boss Mervyn King in July - set out his views on QE before a group of cross-party MPs on parliament's Treasury Select Committee.
"The bank will need to design, implement and ultimately (manage an) exit from unconventional monetary policy measure in a manner that reinforces public confidence," Carney said in written testimony to the committee.
"The exit needs to be achieved without disrupting the gilts (bonds) market," he said ahead of the latest decision.
Quantitative easing involves a central bank creating cash to buy assets such as government and corporate bonds, with the aim of boosting lending by retail banks and stimulating economic activity.
The BoE's main lending rate has stood at the record-low 0.5 per cent since March 2009, when it also embarked on its radical stimulus policy.
By Roland Jackson