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PREVIEW-BoE seen holding QE, rates in Oct pending new data

Published 10/05/2009, 12:46 PM
Updated 10/05/2009, 12:51 PM
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* WHAT: Bank of England monetary policy decision

* WHEN: Thursday, Oct. 8, 1100 GMT

* Rates, QE seen unchanged until Nov inflation forecasts

By Fiona Shaikh

LONDON, Oct 5 (Reuters) - Bank of England rate-setters are likely to sit tight and leave Britain's loose monetary policy unchanged this month, waiting until updated economic forecasts in November before deciding whether to alter the setting.

All 66 analysts polled by Reuters reckon the Monetary Policy Committee will hold borrowing costs at their 0.5 percent record low, and very few expect any further expansion of the quantitative easing (QE) programme from its current 175 billion pounds ($279 billion).

Economic newsflow in recent weeks suggests the BoE's unprecedented measures may have helped Britain return to growth in the third quarter after suffering its deepest downturn in decades, lessening the need for further stimulus for now.

Figures on Monday showed the services sector expanded at its fastest pace in 2 years last month, while brighter consumer morale, rising house prices and signs that banks are becoming slightly more willing to lend reinforce the picture of an economy that is gradually getting back on its feet.

The BoE is expected to complete its asset purchase scheme shortly before November's rate-setting meeting and analysts said policymakers would want to wait until they have more information on the inflation outlook before deciding what action to take.

"If they did want to do any more QE, it might make sense for them to wait until November, when they'll have all the forecasts and know what different levels of QE will do to the economy," said George Buckley, chief UK economist at Deutsche Bank.

"But I think they've probably done enough."

DIVIDED VIEWS

The BoE surprised markets with its 50 billion pound expansion of the QE programme in August and investors were wrong-footed again when minutes to that meeting showed three of the nine policymakers -- including Governor Mervyn King -- had wanted an even bigger boost of 75 billion pounds.

And minutes to September's meeting, when policy was also kept on hold, showed King and fellow MPC member David Miles still felt their call for a bigger increase was justified.

Such differences of opinion have made it harder for analysts to predict what the BoE might do next.

A further confusion came when the Bank of England felt it had to play down market speculation that it was about to cut the rate it paid on commercial banks' reserves after King told legislator such a move could boost QE's effectiveness.

Policymakers are still concerned that it will take a long time for Britain to return to the levels of growth it enjoyed in the years before the financial crisis, suggesting monetary conditions will remain loose for a while yet.

"There are some signs that growth may be beginning to pick up. But we shouldn't get too carried away by this," King said in an interview with the Newcastle Journal. "This is clearly very small growth after a very large fall and unemployment has risen, so it's a difficult challenge ahead."

While it is true that inflation has proved to be stickier than might have been expected given the severity of the downturn, the central bank is also worried the large degree of slack in the economy will keep inflation below its 2 percent target in the medium term.

Despite that, most analysts see little chance that the central bank will extend its asset purchases in November.

"While the committee remains very sensitive to downside risks to the economy, signs for the moment are consistent with recovery taking hold and that QE is having some positive effects," said Philip Shaw, economist at Investec.

"While a key lesson of this crisis is 'never say never', we judge that it is more likely that the MPC decides to keep QE at 175 billion pounds next month as well."

FOR A CHECKLIST OF RECENT ECONOMIC DATA, CLICK ON [ID:nL2599975]

FOR RECENT MPC COMMENTS, CLICK ON [ID:nBOEQUOTES]

(editing by John Stonestreet)

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