BOE holds rates at record low 0.5% despite recession threat

The central bank said in an unexpectedly long statement that its Monetary Policy Committee (MPC) had voted to maintain its emergency QE stimulus at 375 billion pounds (US$589 billion).

The BOE added that overall economic activity in Britain had been “broadly flat” over the past year, despite worries that the economy could be heading for the third recession in five years.

The stimulus has been used to try and help boost economic output, which unexpectedly shrank by 0.3 percent in the final quarter of 2012. However, the economy flatlined over the entire year with zero growth.

ECB Holds Rates

Across in Frankfurt, the European Central Bank also opted to maintain its main interest rate at a record-low level of 0.75 percent, amid ongoing debt strains in the crisis-hit eurozone.

“Over the past year, there has been considerable volatility in quarterly output growth,” the Bank of England said in Thursday's statement.

“Looking through the influence of temporary factors, overall output appears to have been broadly flat. In large part that reflects sharp falls in particular sectors of the economy that are unlikely to be repeated in 2013.

“In contrast, the combined output of the manufacturing and services sectors has grown modestly. Business surveys suggest the pace of expansion is likely to remain muted in the near term,” the BOE added.

The central bank said 12-month inflation would rise further in the near-term and could remain above its 2-percent target for the next two years. However, it was then forecast to return to “around” the target as price pressures fade.

Policymakers also mulled withdrawing QE stimulus, in order to pull inflation lower, but decided that it would risk endangering any recovery. QE can risk stoking inflation as it is tantamount to printing money.

“Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.” the Committee said.

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