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Bank of England holds interest rate, stimulus amount

The Bank of England has voted to freeze its main interest rate at a record-low level of 0.5 per cent, where it has now stood for nearly five years.

LONDON: The Bank of England voted Thursday to keep its main interest rate at a record-low level of 0.5 per cent, where it has now stood for nearly five years.

Opting against following the US Federal Reserve in tapering, the BoE also decided to maintain at £375 billion ($613 billion) the quantitative easing (QE) stimulus that boosts bank lending and economic activity.

Markets shrugged off the decisions, which were both in line with analysts' expectations amid falling inflation, lower unemployment and a pick-up in British economic growth.

"The Bank of England's Monetary Policy Committee (MPC) today voted to maintain Bank Rate at 0.5 per cent," the central bank said in a statement at the conclusion of the monthly gathering.

"The Committee also voted to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion."

Before the meeting, traders speculated that the BoE could alter its so-called "forward guidance" policy on lifting the rate, as unemployment comes down faster than expected.

Governor Mark Carney took charge of the Bank of England last August and launched the forward guidance policy, under which the BoE has stated that it will not raise borrowing costs until Britain's unemployment rate falls to at least 7 per cent.

Canadian national Carney was last month forced to dampen talk of a rate rise any time soon, following news that Britain's unemployment rate fell faster than expected to 7.1 per cent, a near five-year low point.

The BoE made no mention of any strategy change on Thursday.

However, many economists predict that the central bank could choose to overhaul its guidance next Wednesday alongside its latest quarterly economic forecasts.

Guidance set for change

"There have been enough indications from Governor Mark Carney and his colleagues to suggest that guidance will be substantially altered in next week's report, just six months after its adoption," said Jonathan Loynes, chief European economist at British consultancy Capital Economics.

"In particular, it appears virtually certain that the explicit link between monetary policy and the unemployment rate -- an unpredictable indicator with uncertain implications for future inflation -- will be rightly consigned to the darkest corners of policymaking history."

Carney, speaking at the Davos forum last month, declared that the MPC would "consider a range of options" on updating the guidance.

He added that there was "no immediate need to increase interest rates" from their current level.

The BoE's main task is to use monetary policy as a tool to keep annual inflation close to a government-set target of 2 per cent, in order to preserve the value of money.

HSBC economist Simon Wells said after Thursday's rate decision that the most likely option was for the MPC to try and "reassure markets, businesses and households that rates will still be on hold for some time after unemployment reaches 7 per cent.

"At the same time, the MPC could say it will look at a wider range of indicators of slack and play up the inflation outlook."

Britain's 12-month inflation slowed to 2 per cent in December, recent official data showed, touching the lowest level for more than four years.

The nation's economic recovery is meanwhile gaining strength, boosting Prime Minister David Cameron's Conservative-Liberal Democrat coalition government ahead of next year's general election.

The economy expanded at the fastest rate last year since before the global financial crisis. Gross domestic product (GDP) grew by 1.9 per cent in 2013, which was the biggest expansion since 2007, figures showed.

British borrowing costs have meanwhile stood at 0.5 per cent since March 2009, when the BoE also launched its radical QE policy.

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