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BOE Halts Stimulus as Inflation Threat Outweighs Slump

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Source: Bloomberg

Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that has succumbed to a double-dip recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King Thursday held its quantitative easing target at GBP325 billion (US$524 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 per cent. The pound erased its decline against the dollar.

With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Thursday’s decision signals price-growth worries are mounting even as the UK struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.

“They’re concerned about what the effect of the constant criticism on inflation could mean for expectations,” said Philip Rush, an economist at Nomura International Plc in London. “If the view is that the MPC isn’t doing what’s necessary to get inflation back to target becomes widespread, then that can be self-fulfilling.”

The pound rose 0.2 per cent against the dollar after the announcement, erasing its loss on the day. It traded at US$1.6140 as of 12:02 pm in London.

In the euro area, Britain’s biggest export market, Spain is struggling to contain speculation it will need a bailout, while a political stalemate in Greece after elections has raised concerns the country may leave the currency bloc. More than 50 per cent of investors predict a country will exit this year, according to the Bloomberg Global Poll published Thursday.