The Bank of England left interest rates at 0.5 per cent on Thursday, leaving open the option of restarting its quantitative easing program should the economy weaken further.
The Bank issued no statement with its decision. But minutes from the meeting due in a couple of weeks are likely to show policy makers discussed options for injecting more stimulus into the economy, as conditions weaken sharply in the United States and euro zone and financial markets remain turbulent.
All 60 economists polled by Reuters had forecast no change in rates, but a recent run of poor data has underpinned speculation in markets that the Bank may eventually embark on a second round of quantitative easing.
Purchasing managers’ surveys show the manufacturing sector, once the bright spot in Britain’s lacklustre recovery, has been contracting for the last two months, while an equivalent survey of services firms recorded its biggest fall in a decade, denting expectations for a strong rebound in growth in the third quarter after nine months of virtual stagnation.
However, policy makers may be reluctant to restart their asset purchase program with inflation still running at more than double the Bank’s 2 per cent target. Moreover, it is not clear whether buying more government bonds would be an effective tool, as yields on most securities are already close to all-time lows.
British interest rates have stood at 0.5 per cent for more than two years, the longest period of policy inertia since the Second World War, and money markets are not pricing in any tightening until well into 2013.
The Bank completed its first round of quantitative easing in February 2010, having bought £200-billion of assets, mainly British government bonds.
Earlier on Thursday the Organization for Economic Co-operation and Development (OECD) said that central banks in advanced economies should loosen policy if economic weakness persisted, but stopped short of calling for immediate loosening.