BOE Leaves Monetary Policy Unchanged, May Meeting Key

LONDON -(Dow Jones)- The Bank of England left its monetary policy unchanged Thursday amid evidence of a widening split among policy makers over the need for more stimulus, as conflicting economic data stoke fears about the health of the U.K. economy.

The U.K. central bank said its Monetary Policy Committee left its key interest rate at a record low of 0.5% and the target for its bond-buying stimulus program at GBP325 billion. The BOE's key rate has been held at 0.5% since March 2009.

The decision came as no surprise to investors, and both sterling and U.K. government bonds were largely unmoved following the central bank's announcement.

May is shaping up as a key test of policy makers' appetite for further stimulus. Next month's policy meeting will coincide with the completion of the central bank's latest batch of bond purchases under its quantitative easing program as well as its newest quarterly forecasts on inflation and growth.

Unlike in the U.S., where the Federal Reserve appears to have called time on its stimulus program, in the U.K. weak growth and slowing inflation mean expectations of further bond buying by the central bank remain very much alive.

But economists are divided on whether rate-setters will endorse a further dose soon, or pause to take stock as the U.K. charts its way through what BOE Governor Mervyn King expects will be a "zig-zag" recovery.

"I would not be surprised if in May they paused, only to come back to it later," said Neil Williams, chief economist at Hermes Fund Managers, who worries that the central bank's actions risk stoking inflation that will in turn sap growth.

"Expect next to no growth in the U.K. at all this year and possibly next year," he said.

Philip Rush, an economist at Nomura, believes the BOE will act sooner, endorsing another GBP25 billion of stimulus in May in the belief that inflation will continue to slow and growth to disappoint.

Mixed signals on the economy and the emergence of a rift among the central bank's nine rate-setters have made predicting the likely path of U.K. monetary policy trickier than usual.

Official figures published Thursday showed U.K. manufacturing output fell at the sharpest annual rate for more than two years in February, stoking fears of renewed recession. But more timely surveys of purchasing managers in manufacturing, construction and the U.K.'s dominant services sector suggest the economy will expand, albeit modestly, in the first quarter of 2012 after shrinking at the end of last year.

The annual rate of inflation slowed to 3.4% in February from a peak of 5.2% in September, and the BOE expects it to slow towards its 2% target by the end of the year. Yet rising oil prices and the threat of a drought in the U.K. could slow its decline.

The MPC appears divided between policy doves Adam Posen and David Miles, who have already been pushing for more stimulus, and rate-setters Martin Weale and BOE chief economist Spencer Dale, who fear inflation may prove far more persistent than their colleagues expect.

The U.K. economy's prospects for later in the year are clouded by one-off events that risk skewing the data and masking its underlying performance, including Queen Elizabeth's diamond jubilee and the Olympic Games in London. Economists warn the U.K. economy could also be thrown off course if the euro-zone's sovereign debt crisis flares up again.