Bank stays cautious on outlook

Bank of England policymakers acknowledged recent data on the economy had been encouraging but stuck with gloomy projections published in May, minutes to this month's policy meeting showed on Wednesday. Skip related content

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The minutes came as data showed the number of people claiming jobless benefit rose at its slowest pace in almost a year last month, adding to evidence that the pace of the downturn may be slowing.

All nine Monetary Policy Committee members voted to keep interest rates at a record low of 0.5 percent and maintain the bank's 125 billion pound quantitative easing programme, the minutes showed. No arguments were advanced for either increasing the pace of money creation or for scaling it back.

"Overall, the risk of a continued sharp contraction in output in the near term had receded somewhat," the Bank minutes said.

"However, there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially since the Inflation Report had been finalised."

The central bank's quarterly assessment in May suggested a painful recession in Britain would pull inflation below target for a considerable time.

In the press conference accompanying that assessment, Bank Governor Mervyn King warned that recovery would be slow and highly uncertain, despite signs the pace of decline was starting to ease.

"There is nothing to suggest the Committee has significantly changed its previous view about the growth and inflation outlook," said Vicky Redwood, UK economist at Capital Economics.

"There are no signs that the MPC is about to shift its bias towards looser policy anytime soon."

POLICYMAKER CAUTION

The Bank of England's reluctance to jump on the recovery bandwagon chimes with that of Chancellor Alistair Darling who has warned that rising oil prices and weakness in Britain's trading partners still posed downside risks.

Prime Minister Gordon Brown also voiced concern about oil prices but said there were signs that policies put in place to support the economy were having an effect.

"There is good evidence that the proposals that we have put forward are working," Brown told parliament.

Brown's Labour government has provided billions of pounds of support to the banking sector and borrowed heavily to fund tax cuts in a bid to kick-start spending.

Many policymakers believe it is still too early to say the economy has turned. A top Federal Reserve official warned on Tuesday that recent gains in asset prices could not be taken as proof that a strong recovery.

The Bank is concerned that credit conditions remain tight and banks may not have the capacity to lend in sufficient quantities to sustain a recovery.

"Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile," the minutes said.

A continued rise in unemployment and low earnings growth could also hamper a recovery by constraining spending.

Although the number of people claiming jobless benefits rose less than expected in May, the wider measure of unemployment shot up 232,000 in the three months to April and analysts say there could be about three million people out of work by next year.

Average earnings growth excluding bonuses rose by 2.7 percent in the three months to April, its weakest rate since records began in 2001.

"Employees are suffering lower wage growth to protect jobs," said Amit Kara, an economist at UBS.

The MPC noted they had acquired just less than 80 billion pounds of assets already by creating new money and that it would take two more months to complete the 125 billion pound programme.

While they said it was too early to assess the impact of QE on nominal demand, there were some tentative signs it was boosting the money holdings of institutional investors -- the first step in the transmission mechanism.

(Additional reporting by Christina Fincher and Fiona Shaikh; Editing by Andy Bruce/Victoria Main)