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Bank set to leave interest rates unchanged 3 September 2010
Christina Fincher (about the author)

The Bank of England is expected to hold interest rates at a record low next week -- and probably well into next year -- to keep economic recovery on track in the face of a painful fiscal squeeze and weakening global backdrop.

Not all the BoE's monetary policymakers are comfortable with policy remaining so loose. Worries about above-target inflation have prompted Andrew Sentance to vote for a quarter-point rate rise in each of the last three months.

But there is little sign that other BoE policymakers are warming to this view and most economists reckon UK rates will stay at 0.5 percent until the second quarter of 2011 at the earliest.

Britain's economy grew a faster-than-expected 1.2 percent in the second quarter, but this looks set to be the high-water mark, with a slowdown predicted in the second half of the year.

Following is a summary of the main factors the MPC members are likely to discuss at their September 8-9 meeting:

ECONOMIC GROWTH

Britain's economy grew by 1.2 percent in the second quarter of this year, twice as fast as initially expected. However the rebound was flattered by weather-related disruption in the first quarter and more timely indicators -- notably PMI surveys -- have painted a weaker picture.

House price surveys have also shown a weakening in the past few months, with demand faltering and more supply coming onto the market. The Nationwide house price index showed prices fell for a second consecutive month in August, the first time back-to-back falls have been recorded since February 2009.

The BoE revised down its growth forecasts in August and pointed to downside risks from a weaker global recovery and upcoming fiscal tightening.

INFLATION OUTLOOK

Consumer price inflation eased to 3.1 percent in July, having fallen steadily from a 17-month high of 3.7 in April but looks set to remain above the central bank's 2 percent target for at least another year.

BoE Governor Mervyn King has blamed the rise on temporary factors, notably value-added tax, but some members of the monetary policy committee -- notably Andrew Sentance -- are growing nervous inflation may not subside as quickly as expected.

Bond markets continue to suggest a very benign outlook for inflation, but households' price expectations are pushing higher.

A Citi/YouGov poll showed inflation expectations for the year ahead rose to 2.9 percent in August from 2.7 percent in June.

FISCAL POLICY

Britain's coalition government, in power since May, has made cutting the public deficit a top priority.

Finance minister George Osborne's emergency budget, published on June 22, projected a 25 percent cut in spending for many government departments over the coming four years.

The government aims to reduce a deficit of 11 percent of GDP to next to nothing over the course of this parliament, but the price could be slower growth, at least for the next two years.

Source: Reuters