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By Rebecca Clancy | Published Aug 03, 2012

Economists predict Bank to hold policy until late 2012

The Bank of England could move to cut interest rates further amid the recession, but will wait on further action to allow current measures to take effect, according to economists.

Economists said they had expected no change in policy this month as the government’s “funding for lending” scheme started just last week, and said the Bank would also wait for the inflation report out on Wednesday (August 8).

The £80bn scheme is set to enable banks to offer cheaper loans to businesses and households over several years as the Bank of England will provide capital to the banks at below market rates, in return for the lenders sustaining or expanding their lending to the UK’s non-financial sector.

Last week the Bank of England’s rate-setting committee voted to hold the interest rate at 0.5 per cent, and maintain its quantitative easing programme at £375bn, after it voted to boost it by £50bn last month.

Peter Hensman, global strategist at Newton Investment Management, said the scheme and “distortions to data”, such as the Olympics and weather-related issues, made any immediate policy response “unlikely”.

He said any further easing “will likely be saved” until later in the year, and only if “the threats to domestic economic and financial conditions from the eurozone and the broader global slowdown become apparent”, in spite of a 0.7 per cent contraction in the UK economy in the second quarter of 2012.

Barry Naisbitt, chief economist at Santander UK, said attention would turn to the inflation report which will give a clearer indication of the Bank’s view on growth and inflation.

“The information later this month might give some clues as to the likelihood of further policy actions in the coming months to boost economic activity,” he said.

Vicky Redwood, chief UK economist at Capital Economics, said she expected the inflation report to “leave the door open” to further stimulus and she also expected an interest rate cut in November to 0.25 per cent, although a reduction to 0.1 per cent was also “possible”.

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