Bank of England to keep rates at record low

The Bank of England is expected to keep interest rates at a record low 0.5 per cent and refrain from expanding its quantitative easing plan yesterday, as it tries to gauge how Britain's recession-hit economy is faring.

There have been signs the worst of the recession is over - the closely-watched purchasing managers' index surveys even suggest growth may have resumed last month - but BoE Governor Mervyn King has emphasised just how uncertain the outlook is.

Markets hope the expected 'no change' is accompanied by some words from the central bank on how its £125 billion asset-buying programme is progressing and whether it believes economic conditions are improving.

While there is an outside risk the BoE could announce more QE measures yesterday or ask for a higher limit than the £150 billion set by government, it has made clear it will be more than ready to withdraw the stimulus when it sees fit.

"The authorities should not take the recovery for granted, and it will be important to keep the current stimulus in place for some time to come until economic growth gains considerable traction," said George Buckley, an economist at Deutsche Bank.

King has expressed concern the recovery may not be sustained if banks don't start lending at more normal levels again.

He faced criticism for telling reporters at last month's Inflation Report press conference there was as much chance of the economy shrinking next year as there was of it growing. And the BoE's quarterly growth forecasts - downgraded from February - showed more work might need to be done to bring about a full recovery before the end of the year.

But Wednesday's stronger-than-expected services PMI indicated the dominant services sector was growing already and a composite measure of the services, construction and manufacturing PMIs showed overall growth in May as well.

"A fairly clear signal that the recession ended in May," said Allan Monks, an economist at JP Morgan.

"If the Monetary Policy Committee choose to defer this week, the likelihood that QE is not extended beyond £125 billion is high."

But even if Britain is coming out of recession quicker than both markets and policymakers had expected, there is a big risk that the recovery will be very sluggish.

Data this week showed banks cut net consumer lending by 494 million pounds in April after a small rise in March.

"Economic and financial conditions remain very difficult and we suspect that relapses in activity are highly likely with the result that sustainable growth will not develop until 2010 and then only gradually," said Howard Archer at Global Insight.