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Bank of England leaves policy on hold as economy worsens

A woman carries a shopping bag decorated with a Union flag past the columns of the Bank of England in the City of London, July 3, 2012.

ANDREW WINNING/REUTERS

The Bank of England left its monetary policy unchanged on Thursday, judging that its July decision to expand its buying of government bonds is enough stimulus for now despite signs of growing economic weakness.

Since the BoE's Monetary Policy Committee met last month, official data has shown that Britain's economy shrank much more than expected in the second quarter of 2012, and a survey showed that factory activity fell by the most in three years in July.

But after a two-day meeting that ended earlier on Thursday, the MPC made no change to its current programme to buy 50 billion pounds of British government bonds, which will take its total purchases to £375-billion ($583.7-billion U.S.) by early November.

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The central bank also left its interest rate unchanged at 0.5 per cent, in line with a Reuters poll of economists, who overwhelmingly said they did not expect any change to interest rates or to the BoE's gilt purchases.

Most economists do expect the BoE to approve further government bond purchases, but only later this year, and they also think the BoE could possibly even cut interest rates further – something it has steadfastly resisted since its last rate cut in March 2009.

At July's meeting, MPC members said they may reconsider a rate cut in a few months time once they have assessed the impact of a new BoE and finance ministry scheme to offer cheap credit to banks that lend to businesses and home-buyers.

This Funding for Lending Scheme was also a major reason why two MPC members, Ben Broadbent and Spencer Dale, opposed further gilt purchases in July, as they wanted to assess its impact before loosening policy further.

The BoE made no statement alongside its August policy decision, as usual when there is no change.

A much clearer insight into its outlook will come on Aug. 8, when BoE Governor Mervyn King presents the central bank's quarterly forecast update.

Downward revisions are likely to both the growth and inflation forecasts. As well as weak growth, inflation has fallen much faster than the BoE predicted in May to hit a 2-1/2 year low of 2.4 per cent in June, close to the central bank's 2 per cent target.

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