UK rate setters unanimous in maintaining policy

AP News
Posted: Dec 21, 2011 7:16 AM
UK rate setters unanimous in maintaining policy

The British government's plan to reduce its borrowings appeared to be on track in November, official figures showed Wednesday, even as the country's economy remains threatened from the debt crisis in Europe, rising unemployment and weak domestic growth.

The Bank of England's rate-setting body said it expects to see some economic recovery in late 2012, but warned that volatility in the 17-nation eurozone could dent Britain's growth.

Minutes of the last meeting of the Monetary Policy Committee showed that all nine members voted to keep the benchmark interest rate at the all-time low of 0.5 percent and to maintain the monetary stimulus at 275 billion pounds ($433 billion).

The rate-setters, who are tasked with keeping inflation around the 2 percent level, said they expected price pressures to ease quite dramatically next year from 5 percent in October, largely because the factors that drove prices higher in 2011, including higher sales taxes and energy prices, drop out of the annual comparison. They also said high unemployment would keep a lid on domestically generated inflation by weighing on wage demands.

"It seemed likely that a contraction in activity was underway in the euro area, although the United States was still experiencing moderate growth," the rate-setters said, according to the minutes. "Looking through the near-term outlook of weak demand, the committee's central view remained there would be some recovery in the latter part of 2012."

Meanwhile, the Office for National Statistics, revealed that the U.K.'s public sector net borrowing excluding financial interventions _ a broad gauge of the state of the country's public finances _ fell to 18.1 billion pounds ($28.5billion) in November from 20.4 billion pounds a year earlier.

The fall was largely driven by higher tax receipts from the new levy on banks and an increase in the sales tax to 20 percent.

Analysts said the British government is on track to hit its full year borrowing targets of 127 billion pounds.

Britain's government has staked its reputation on a strategy of cutting costs and jobs in the public sector while trying to boost private sector growth. Britain's unemployment rate is now 8.3 percent, up 0.4 percent on the quarter and at its highest level since 1996.

Influential credit ratings agency Moody's warned Tuesday night that the U.K.'s cherished triple A credit rating is at risk from both a weak domestic economy and the financial crisis in the eurozone. It warned that the country's deficit "has eroded its ability to absorb further macroeconomic or fiscal shocks without rating implications."

Any cut in Britain's credit ratings would make it more expensive to pay down the country's debts.

Howard Archer, chief economist at IHS Global Insight, said the public finances are improving, but high unemployment and a lack of economic growth may derail the plans of finance minister George Osborne.

"While the November public finance data will be largely well received by the government, there is still a very real danger that the Chancellor will before long face the difficult decision of accepting further slippage in his fiscal targets or imposing more fiscal tightening on a struggling economy," Archer said.

While the government has been tightening fiscal policy, the Bank of England has kept monetary policy extremely loose and the minutes to the last meeting showed that some rate-setters indicated that more asset purchases "may be warranted in due course" in light of the problems afflicting the eurozone, Britain's main trading partner.

Fears were raised that the worst risks in the eurozone "had not so far crystallized" and that the possibility remained that banks would find it difficult to secure funding alongside volatile financial markets.