No Change On BoE's Monetary Policy, Rate Unchanged At 0.50 Percent

BoE policy makers opted to leave both interest rate and the Asset Purchase Facility unchanged at 0.50% and 200 billion pounds respectively, in line with forecasts. They completed a year-and-half of record low rates since March 2009 in order to boost the recovery that started to gain momentum amid the austerity measures adopted by the government to tame the skyrocketing budget deficit.

The bank's decision preserves the monetary policy aiming to supports growth, where the effect was witnessed throughout the second quarter GDP as it expanded by 1.2 percent, the fastest pace in nearly nine-years.

The bank did not hint for a possible interest rate hike or tightening its policy due to elevated unemployment, unstable market conditions, huge budget deficit and sovereign debt problems that hammered activities in the region over the past period. Thus, the bank is still committed to its dovish stance, rather than focusing on elevated inflation and changing its policy as King and the majority are offsetting Sentance's calls and acting preemptively to prevent the economy from a relapse as spending cuts take effect.

MPC Member Andrew Sentance called for interest rates hike of 25 basis points along with withdrawing stimulus programs from financial markets in order to control elevated inflation levels that currently hover above the upper-limit set by the bank of 3.0 percent.

Inflation in UK reached in June 3.2 percent, above the bank's desired levels of 2.0 percent and the upper limit of 3.0 percent, which raised calls that the bank should start monetary tightening and raise interest rates before the end of the year in order to restrain inflation levels, especially as it persisted above 3.0% since the beginning of the year.

The bank expects to raise interest rate to 1.0 percent by the fourth quarter of 2011 and 1.9 percent by the end of 2012 along with expecting a decline in inflation levels to hover near 1.5 percent during 2012.

Bank of England assured that commercial activities in the country are disappointing and despite the big slump in the value of the pound over the past period, UK has failed to reduce its budget deficit. Banks in Britain still face challenges especially tight credit conditions that hammers down small and medium size banks from obtaining the necessary funding to expand their investments.

Chancellor of the Exchequer, George Osborne stated that 'tighter fiscal policy can enable interest rates to stay lower for longer,' which can boost growth along with the severs spending cut. Budget deficit reached 11.1 percent of 2009 GDP. Rating agencies undoubtedly welcomed the new austerity measures despite warning of the need to continue to monitor developments closely to assure their positive materialization into cutting the deficit yet assured that this is the right track for UK to maintain its top credit rating.

The British government, led by Osborne announced additional expenditure cuts of 30 billion pounds a year by 2014-15. He said the government will cut the deficit to 20 billion pounds by 2015 to 2016. In addition, the plan will include hiking the VAT by 2.5 percent, starting January which will raise the rate up to 20.0 percent. The plan was introduced to markets on June 22.

BoE lowered its growth estimate for this year, where the bank expects the economy to grow by nearly 3.0 percent, compared with the previous estimates of 3.6 percent, as for inflation, the bank expects that inflation will reach 1.5 percent by the year 2012, which is below the desired levels that is set by the bank, accordingly, supporting expectations for a tighter monetary policy by the bank.

The British economy continue the rough path of recovery, where the economy expanded during the first six months of this year close to the historic average rate, but still below the peak that was witnessed before the crisis, and threatened with relapse in this second half. Bank of England revised their growth expectations lower for this year averaging 3.0 %from 3.6% while they expect inflation levels to remain elevated and above 2.0 percent throughout the upcoming year.

The bank stated that inflation will remain above 2.0 percent which is considered the desired rate by the bank for inflation in the country, meanwhile, the bank noted that rising prices are affected by three temporary factors which are sterling's depreciation in trade weighted terms, as it dropped by nearly 25.0 percent, along with rising oil prices and the government reversal of the VAT reduction to take the tax back to 17.5 percent and to raise it further to 20.0 percent in January 2011.