BoE leaves rates steady, keeps QE unchanged

The Bank of England left interest rates unchanged at a record low of 0.5 percent for the third month running, and said it would continue its 125 billion pound asset-buying programme to tackle the recession.

"The Committee expects that the announced programme will take another two months to complete," the central bank said in a statement. "The scale of the programme will be kept under review."

The decision was widely expected, coming a month after the Monetary Policy Committee said it would boost its quantitative easing programme by 50 billion pounds.

Still, the pound ticked higher after the decision and government bonds pared gains as some dealers had priced in the possibility that the BoE would expand its asset-buying programme, which mostly covers gilts.

Most analysts still expect the BoE to extend the programme by at least another 25 billion pounds, the maximum currently permitted by the government.

"More QE is possible in the coming months if there appears to be little progress on stimulating nominal demand -- the Bank may step up its asset purchases and ask the Chancellor to authorise more money," said Andrew Goodwin, senior economic adviser to the Ernst and Young ITEM Club.

A clutch of surveys over the past month have suggested that the worst may be over for the British economy, which is expected to shrink by more than 3 percent this year.

Recovery may also be underway globally after the worst financial crisis in a generation. On Tuesday, a top Federal Reserve official raised the prospect of US interest rates rising to nip inflation risks.

The European Central Bank is expected to keep euro zone interest rates unchanged at 1 percent at 1145 GMT.

The data flow in Britain has been improving. Shortly before the MPC decision, the Halifax survey showed house prices jumped 2.6 percent in May, the biggest monthly rise since 2002.

Yesterday, another survey showed the service sector -- which accounts for three-quarters of the economy -- returning to growth last month, raising speculation the recession is now over.

But the BoE is likely to refrain from declaring victory yet and keep monetary policy loose for some time to come, particularly when commercial bank lending has yet to return to normal and unemployment looks likely to rise.

"We suspect the Bank will be cautious about taking back policy easing until it is very sure of the durability and strength of the recovery," said George Buckley, chief UK economist at Deutsche Bank. "We see official rates rising only a year from now."