Bank of England set to hold interest rates

The Bank of England will hold back from prescribing further doses of emergency medicine for the ailing recovery tomorrow amid signs the economy will return to growth.

The Bank's Monetary Policy Committee will maintain interest rates at record lows of 0.5 per cent and leave the targeted size of its quantitative easing (QE) programme at £375 billion as the Bank works through £50 billion of asset purchases announced in July.

Most economists think the nine-strong panel will sanction further QE in November and hold their nerve tomorrow, a view reinforced by strong services data released earlier this week.

The move will come shortly after the Bank admitted that QE has increased the fortunes of the wealthiest 5 per cent of Britons while eroding the value of many pension funds.

Vicky Redwood, chief economist at Capital Economics, said: “With the £50 billion of extra asset purchases announced in July still under way, there is no immediate pressure on the MPC to do more this month.”

Earlier this week, the Bank was presented with mixed purchasing managers surveys, showing an improved manufacturing and services sector but a persistently struggling construction performance.

Aside from the surveys, there has been little change in the economic outlook since the MPC's last meeting, although SSE's 9 per cent hike in energy bills from next month and the impact of US drought on food prices have threatened the inflation outlook.

The Bank currently expects the rate of inflation - which increased to 2.6 per cent in July - to fall to the Government's 2 per cent target by the end of this year.

Governor Sir Mervyn King and his colleagues will also want more time to assess the impact of the UK's £80 billion “funding for lending” scheme, which was launched in the summer with the aim of unclogging the flow of credit.

Investec Securities economist Victoria Clarke said: “Over the past month the outlook hasn't shifted drastically, but inflation risks do appear to have nudged up.

“Even so we continue to see the committee backing more asset purchases in November when the current target of £375 billion is reached.”

The committee has also considered cutting rates below the current level of 0.5 per cent - a move that once seemed improbable - although the Bank continues to favour QE as its economic weapon of choice.

This week's two-day MPC meeting, which concludes tomorrow, is the first for former CBI chief economic adviser Ian McCafferty, who has replaced Adam Posen.

In a report released last month, the Bank said its QE programme has increased total household wealth by 16 per cent, or £600 billion, after increasing the value of assets.

But it is the richest households - holding around 40 per cent of these assets - that have benefited the most, according to the Bank.

The report also found that pension funds with hefty shortfalls will have seen their deficits increased further, but the Bank rejected fears that QE has hurt pensioners.

However, Dr Ros Altmann, director-general of Saga, said the Bank was wrong to suggest that pensioners have not lost out and said QE was causing “significant economic damage”.

PA