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Bank of England freezes record-low interest rate

The Bank of England on Thursday froze record-low interest rates amid Britain's economic recovery, as the European Central Bank eased its monetary policy to avert deflation.

LONDON: The Bank of England on Thursday froze record-low interest rates amid Britain's economic recovery, as the European Central Bank eased its monetary policy to avert deflation.

BoE policymakers decided to keep its key rate at a record-low level of 0.50 per cent, and maintain the level of cash stimulus in the economy at £375 billion (US$628 billion, 461 billion euros), it said in a statement.

The Bank of England, in apparent contrast with the ECB, is slowly moving towards raising borrowing costs after a years-long pause.

Policymaker Martin Weale last week broke ranks to declare that Britain needed to start raising rates gradually to avoid sharp and painful hikes in the future.

Minutes from the MPC's previous May gathering showed that the decision to keep rates on hold was "becoming more balanced" for some members of the nine-strong committee panel.

Analysts saw this as a signal of an increase in support towards tightening borrowing costs amid the nation's brightening economic outlook.

At the same time, some economists believe that the strengthening British economy can now cope with higher borrowing costs.

"Although today's MPC meeting was never likely to result in a policy change, recent developments may have made the decision to keep interest rates on hold more marginal for some members," said Capital Economics analyst Samuel Tombs.

"Most of all, signs from the latest activity and confidence surveys that the recovery might have gathered pace in the second quarter may have led some members to question whether the economy still needs ultra-low interest rates."

Britain is a member of the European Union but not of the eurozone, and so controls its own monetary policy. Rates for the eurozone are set by the European Central Bank in Frankfurt which eased policy on Thursday shortly after the Bank of England's decision, to ward off the dangers of deflation.

British rates have stood at 0.50 per cent for more than five years to aid economic recovery from the global financial crisis of 2008.

The economy powered ahead in the first quarter of this year with gross domestic product growth of 0.8 per cent, but there remain stubborn concerns about a robust housing market amid signs of a potential bubble in London.

In another bright spot, British retail sales surged 6.9 per cent in April compared with a year earlier, recent official data showed.

That was the fastest rate for a decade and persuaded HSBC bank to lift its second-quarter growth forecast to 0.9 per cent from 0.7 per cent.

"Weale confirmed he thought there was less slack in the economy than the MPC's central judgement and that if rates were going to rise only gradually there would be case for starting the cycle sooner rather than later," said HSBC economist Simon Wells.

"However, despite considerable uncertainty he thought the MPC could wait 'a bit longer' and that the case for a rate rise is 'not so urgent it needs doing now'.

"As Mr Weale is likely to be the first member to vote for a rate rise, this suggests today's decision was unanimous.

"But if the UK data remain strong, we think he could start voting for rate rises in the late summer."

The BoE has already stated that it will not consider raising interest rates until all the spare capacity, or slack, in the economy has been absorbed.

Some experts are meanwhile calling on the central bank to use use other tools at its disposal to help dampen soaring British house prices, especially in London over the past year.

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