The Bank of England opted against injecting more stimulus to help the struggling British economy on Thursday, as signs of resilience kept recovery hopes alive while the euro zone works on a fix to its festering debt crisis.
All but a handful of economists had expected the BoE to stick with May’s decision to conduct no new quantitative easing, a view reinforced after service sector purchasing managers’ data earlier in the day remained solid, in contrast to a sharp fall in its manufacturing equivalent last week.
The BoE kept its key interest rate unchanged at a record low 0.5 per cent, and the total quantitative easing conducted to date will stay at 325 billion pounds.
Despite a big drop in April, British inflation is still high at 3 percent, and last month the BoE said it would take nine months longer than previously thought for it to return to its 2 per cent target.
Since then, some BoE policy makers have played down the prospect of further stimulus, unless an escalation of the euro crisis worsens Britain’s economic prospects. Only one of the nine members of the Monetary Policy Committee backed more QE in May, though for others the decision was finely balanced.
The future of the euro zone still remains unclear, with Greece facing national elections on June 17 that could bring to power parties opposed to a bailout, while Spain is calling for euro zone assistance to recapitalise its banks.
In recent days, there have been signs that developments in Spain could pave the way to a “fiscal union” between euro zone countries that some observers believe might provide a lasting solution to the debt crisis.
Britain’s own economic fortunes heavily depend on the health of the euro zone, the destination for around half of British exports. But slower domestic demand, as well as overseas weakness, lay behind a slump in the manufacturing PMI survey to a three-year low last week.
Revised first-quarter GDP data also showed that Britain’s economy was slightly deeper in recession than first thought, though in recent months the BoE has paid closer attention to private-sector measures such as the PMI surveys.
However, with a solid services PMI number and a fall in unemployment, the BoE was unlikely to judge that further QE was needed yet - even if last month the International Monetary Fund urged it to consider more steps to help the economy.