Bank of England Keeps Rates Steady

Bank of England Keeps Rates Steady
By JULIA WERDIGIER and MATTHEW SALTMARSH
Copyright by The New York Times
Published: May 10, 2010
http://www.nytimes.com/2010/05/11/business/global/11boe.html?hpw


LONDON — The Bank of England decided Monday to hold steady on monetary policy after last week’s general election failed to give any party a governing majority and amid the recent turmoil in European debt markets.

The central bank left its benchmark interest rate at 0.5 percent, where it has been since March 2009. It also decided to leave unchanged its program of buying government bonds and other assets to revive the economy. That program currently stands at £200 billion.

“Now is not the time to change monetary policy with heightened political uncertainty and the fallout from the Greek crisis both threats to still fragile longer-term growth prospects,” Howard Archer, chief British economist at HIS Global Insight in London, said.

In a brief statement accompanying the decision, the bank provided no further comment on its policies or the economy.

Leaders of Britain’s three largest political parties met over the weekend and again Monday to discuss the possibility of forming a coalition government.

Nick Clegg, the leader of the third largest party, the Liberal Democrats said Monday that the party leaders were “working together round the clock to try and act on the decision the British people made” in Thursday’s election, The Associated Press reported.

The Liberals have been described as “king makers” because their support could help either the largest party, the Conservatives, or the No.2, Labour, form a government

“I don’t think a prolonged period of uncertainty is a good thing,” Mr. Clegg said, urging voters to “stay with us” as talks continued.

The Bank of England had delayed its decision on monetary policy from last week to await the election outcome.

The uncertain political situation at a time when many investors and rating agencies are looking for a clear plan to tackle the country’s record budget deficit weighed on the pound and the stock market.

But British assets rallied Monday after an accord reached in the early hours Monday among European finance ministers and the International Monetary Fund and intervention in the bond markets by euro-area central banks.

The FTSE-100 was up 4.4 percent around midday and the pound climbed to $1.4990 from $1.4804 late Friday. But the yield on the 10-year British government bond rose amid continued worries about the ability of a British coalition to rein in the budget deficit.

Some economists voiced concern that even if two parties agree on forming a government it would be weak and the chances of a new election high. It is the first time since 1974 that no single party had won enough seats in Parliament to govern alone.

“Speed is of the essence,” analysts at Deutsche Bank said in a research note. “The market dynamics currently playing out in Europe highlight the risk of political posturing, and rating agencies have been quick to react to signs of weak political resolve.”

Last week, the pound fell to the lowest level against the dollar in 13 months after the election and the FTSE 100 slumped.

A relatively weak pound had helped Britain’s exports and its economy to return to growth but the recovery remains fragile. It grew 0.2 percent in the first quarter even though some economists said that figure would be corrected upwards in the next three months. There were some encouraging signs from the construction industry as demand for homes and commercial property rose in March. Unemployment fell more than economists expected in March.

But a weaker pound also stoked inflation while consumers continued to hold back on spending. Britain’s services industry also took a hit last month when the eruption of a volcano in Iceland grounded flights.

Roger Bootle, Deloitte’s economic adviser and a former adviser at the British Treasury, said recently that the exchange rate looks unlikely to be enough “to offset a prolonged period of sluggish domestic demand.”

Matthew Saltmarsh reported from Paris.