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Bank of England keeps policy steady despite darker UK outlook

The Bank of England is seen between pillars in the City of London April 11, 2011. REUTERS/Stefan Wermuth
The Bank of England is seen between pillars in the City of London April 11, 2011. REUTERS/Stefan Wermuth

By David Milliken and Olesya Dmitracova

LONDON (Reuters) - The Bank of England left monetary policy unchanged on Thursday, voting as expected to stick with last month's decision not to buy more government bonds to bolster Britain's stagnant economy.

The decision comes despite finance minister George Osborne saying on Wednesday that Britain's economy would grow much more slowly than expected over the next three years and that a key debt reduction goal would not be met.

The forecasts also showed Britain's economy was likely to shrink over the last three months of 2012 - a prospect reinforced by weak trade data earlier on Thursday and downbeat purchasing managers' surveys this week.

After a two-day meeting, the BoE's nine-member Monetary Policy Committee said its main interest rate would stay at a record-low 0.5 percent and it would not add to the 375 billion pounds ($603 billion) of bonds it has bought so far.

None of the 66 economists polled by Reuters last week had expected a change in interest rates or in the BoE's quantitative easing bond buying total, and there was no immediate market reaction to the decision.

"October's rise in inflation, the deal to transfer interest receipts ... to the government as well as doubts about the impact of more QE in the current economic environment, makes it reluctant to do more," said Joost Beaumont, an economist at Dutch bank ABN AMRO.

Britain recorded economic growth of 1.0 percent in the third quarter of 2012, marking an end to nine months of recession - its second since the 2008-09 financial crisis.

But most of the rebound was driven by a technical bounce due to the London Olympics and extra public holidays in the preceding quarter.

STICKY INFLATION

Last month's decision not to loosen monetary policy further was driven by an unexpectedly big jump in inflation in October to 2.7 percent, as well as a government decision to take back gilt interest paid to the BoE, which was tantamount to about 35 billion pounds of extra asset purchases.

Consumer price inflation has been above the BoE's 2 percent target since December 2009.

Economists are roughly split on whether the BoE will restart asset purchases in future. However, any restart is not expected before February at the earliest, when the BoE publishes its next quarterly economic update.

"Doubts over the momentum of the recovery suggest there will still be some serious discussions over whether to sanction further asset purchases," said Investec economist Philip Shaw.

"Our own view is that the economy will show some signs of life again over the next couple of months and that inflation will climb above 3 percent early next year, and so we do not expect the MPC to extend QE in 2013. But this could be a close run thing," he added.

BoE Governor Mervyn King and his deputy governor Charlie Bean both left the door open to future asset purchases in statements last week, while one MPC member, Paul Fisher, told a parliament committee that the economy might well need more stimulus early next year.

Analysts were also surprised when Ben Broadbent, whom most place at the more hawkish end of the MPC, said he had mulled further stimulus in November.

In the longer term, the future of the BoE's asset purchases will lie in the hands of King's successor, current Bank of Canada governor Mark Carney, who takes over in London in July.

A further key factor will be the success of the BoE's Funding for Lending Scheme, which started in August and aims to spur lending and lower households' and firms' borrowing costs by offering banks cheap finance if they lend more.

(Reporting by David Milliken and Olesya Dmitracova; Editing by Hugh Lawson)

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