BoE to sit tight on policy despite shock manufacturing data

Thu Apr 5, 2012 6:26am EDT
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By Sven Egenter and Olesya Dmitracova

LONDON (Reuters) - The Bank of England is set to leave its policy settings on hold on Thursday as the economy looks to have skirted recession although a shock slump in February factory output served as a reminder that the economy is not on a sound footing yet.

The British economy has not recovered fully from the 2007-2009 slump and a contraction in the final three months of last year, due in part to the escalating euro zone debt crisis, had stoked fears of a new recession.

A surprise 1 percent slump in manufacturing output in February, unveiled on Thursday, showed that the economy was still on shaky grounds, after a recent slew of more upbeat business surveys had indicated that a modest recovery was on track.

The central bank will announce its policy decision at 1100 GMT, and all economists polled by Reuters predicted that the bank would leave interest rates and the target for its asset purchases unchanged, after it committed in February to buy 50 billion pounds ($80 billion) more of gilts.

The pound, which has risen in recent weeks as the prospect for further quantitative easing by the Bank of England (BoE) dwindled, dipped against the dollar on Thursday after the factory output data.

Most economists, however, hold the view that the BoE will not expand its quantitative easing program this year, and the recent output figures did little to change that.

"If I were on the MPC, I'd be more worried about whether inflation is coming back (down) as quickly as I thought," Tom Vosa from National Australia Bank said.

The Bank of England, along with the government, is forecasting that falling inflation will bring some relief to hard-pressed consumers and allow for more consumption.   Continued...