Economic fears again led to keeping rates on hold

The Bank of England came no closer to raising interest rates this month as concerns about the strength of the economy outweighed inflation risks, further dimming the chance of an increase before August.

Its Monetary Policy Committee were split 6-3 again in favour of holding rates at 0.5 per cent, minutes of its April 6-7 meeting which were published yesterday showed, saying that the medium-term outlook for inflation had not changed enough to alter their view.

Although the minutes said the near-term path of inflation was likely to be higher than the Bank forecast in February, the extent of the recovery from the slowdown at the end of last year was still unclear.

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The minutes dropped the line used in March that some of those in favour of steady rates thought the case for a hike had increas- ed.

This month, they said news on demand and activity over the month had probably been to the downside.

“The dovish tone of the minutes has further reduced the chances of a rise in interest rates at next month’s meeting,” said Vicky Redwood, economist at Capital Economics.

“If the recent weaker tone of the economic data is sustained, we still think that a rate hike this year can just about be avoided.”

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Interest rate futures rose as investors scaled back their expectations for a first post-crisis rise and Barclays, Citi and Nomura pushed back their expectations for the first rise to August from May.

That may still be too optimistic, as markets are now pricing in slightly above a 50 per cent chance of a rise in August, and November futures are just pricing in a full quarter-point hike.

The BoE has kept rates at a record low for more than two years, in contrast to the European Central Bank, which raised borrowing costs this month for the first time in almost two years.

But those on the MPC who want to hold rates are worried that tightening policy at a time when consumer demand is so weak could derail Britain’s fragile economic recovery.

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Analysts are waiting for preliminary data from the Office for National Statistics on April 27 to see how strongly the economy rebounded in the first three months of this year from its unexpected 0.5 per cent decline at the end of 2010.