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UK rates to stay at record low as economy wobbles.

Concern about the pace of economic recovery looks set to persuade the Bank of England to keep interest rates at rock-bottom not just this week but for months to come.

UK interest rates have stood at 0.5% since March 2009, when a deep recession and the threat of deflation prompted central banks around the world to slash rates to record lows.

Since then, inflation in Britain has returned as a force to be reckoned with. Consumer prices are rising more than twice as fast as the BoE would like, but it has been reluctant to tighten monetary policy when the government's massive fiscal tightening is already crimping growth.

"The Bank can do nothing about inflation over the next six months, and will not try to," said Paul Mortimer-Lee, chief global economist at BNP Paribas.

"It will focus on inflation in two years, which will be much lower than now." After contracting at the end 2010, Britain's economy has struggled to gather pace. Consumer confidence has tumbled, the labour market is stagnant and house prices are flatlining at best.

Well-known retail names that have collapsed in the past few months include wine seller Oddbins, home improvement firm Focus DIY, and home furnishings retailer Habitat UK.

While the European Central Bank looks set to raise rates this month -- its second move since April -- all 70 economists polled by Reuters last week predicted that the BoE's key rate would stay at 0.5%.

NO RISE BEFORE 2012? Economists have scrambled to push back their rate rise forecasts in the past few weeks, taking their cue from money markets which are not fully pricing in a hike until mid-2012.

Surveys of manufacturing, construction and services this week suggest the economy grew just 0.3% in the second quarter of this year after an already disappointing reading of 0.5% in the first.

At 4.5%, inflation is more than double the central bank's target, but there appears little threat of a wage-price spiral.

The BoE's nine-member monetary policy committee voted 7-2 to keep rates on hold in June. Ben Broadbent, who replaced arch-hawk Andrew Sentence, joined the majority camp in favour of the status quo.

Minutes to the meeting observed that "the current weakness of demand growth was likely to persist for longer than previously thought". And several policymakers -- not just arch-dove Adam Posen -- considered that more quantitative easing could be warranted in the future if growth remained weak.

Most economists, however, believe printing more money is unlikely short of a disorderly Greek debt default or similar financial crisis.

"Many investors remain wary about QE and the monetary policy committee might find it difficult to sell the idea to markets with the current rate of inflation so far above target," said Philip Shaw at Investec.

The BoE announces its rate decision at 1100 GMT and will publish minutes of its meeting, along with a voting breakdown, two weeks later.

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Publication:Financial Mirror (Cyprus)
Date:Jul 7, 2011
Words:500
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