FRANKFURT (MarketWatch) -- The Bank of England's Monetary Policy Committee on Thursday left the central bank's key lending rate unchanged at a record low 0.5% and made no move to re-start its 200 billion pound ($303.5 billion) program of asset purchases.
Both moves were widely expected. But the steady policy belied growing unease on the panel over persistently above-target consumer price inflation.
Market participants will pay close attention to the minutes of the meeting, which are scheduled for release on July 21.
The minutes of the June meeting shocked markets by revealing that MPC member Andrew Sentance dissented from the panel's steady policy decision by voting for a quarter-point rate hike. Sentance subsequently outlined ongoing worries about inflation pressures, indicating he may have pressed for a hike again this month.
Economists had seen little prospect Sentance would manage to convince other MPC members to join him in calling for a rate hike at this stage, though the recent minutes have shown increased unease on the committee over inflation pressures.
Reuters
Britain's Governor of the Bank of England Mervyn King
The annual rate of consumer inflation slowed to 3.4% in June from a 17-month peak of 3.7% in May. Surveys have shown a rise in consumers' inflation expectations, a sensitive subject for MPC members.
But BOE Governor Mervyn King has argued that the large degree of spare capacity left in the economy as a result of the recession will exert downward pressure on inflation over coming months.
Moreover, the BOE must also deal with the economic implications of the new British government's budget-tightening moves, economists said. The emergency budget unveiled by Chancellor of the Exchequer George Osborne on June 22 included £30 billion a year in spending cuts through 2014-15 and a hike in the value-added tax charged on most goods to 20% from 17.5%.
King, who has welcomed the government's budget-cutting efforts, has said monetary policy must be set in light of the coming fiscal consolidation, economists note.
"While the MPC was clearly expecting significant extra fiscal tightening to be announced, we believe that the scale of the measures set out will be sufficient to encourage most MPC members to remain in 'wait and see' mode on inflation and growth and to hold off from raising interest rates in the near term at least," said Howard Archer, chief U.K. and European economist at IHS Global Insight.
Attention now turns to the European Central Bank, which is expected to leave its key lending rate at a record low 1% when it announces the outcome of the monthly meeting of its rate-setting Governing Council at 1:45 p.m. Frankfurt time, or 7:45 a.m. Eastern.
The main event will be ECB President Jean-Claude Trichet's monthly news conference, scheduled to begin at 8:30 a.m. Eastern, which is expected to focus on the criteria used in European bank stress tests and liquidity concerns amid the region's ongoing sovereign-debt woes.
European regulators on Wednesday said 91 European banks would be subject to the stress tests, which are set to be published on July 23.
European authorities hope the tests, which are being overseen by the Committee of European Banking Supervisors and the ECB, will help boost confidence in the European banking sector.
But economists said authorities must overcome skepticism about the rigor of the tests.
Regulators said the tests will assume a three percentage point decline in gross domestic product growth across the euro zone from the European Commission's forecasts, which call for 1% growth in 2010.
News reports said the tests will assume a 17% haircut -- or discount -- in the value of Greek government debt. But economists questioned whether such a cut would sufficiently reflect the potential impact of a default.
At the same time, ECB watchers said it was doubtful Trichet would provide much additional detail regarding the scope of the tests
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