Bank of England keeps policy unchanged as economy brightens

Reuters

* No change to 0.5 pct rates or 375 bln stg asset purchases

* UK economy showing signs of recovery, but output stillbelow peak

* BoE committed to low rates until unemployment falls

By David Milliken

LONDON, Oct 10 (Reuters) - The Bank of England made nochange to its monetary policy on Thursday, sticking to itspledge to keep interest rates at a record low for theforeseeable future despite signs of a strengthening economicrecovery.

Most data over the past month has suggested that Britain'sstalled recovery is finally getting back in gear, and on Tuesdaythe International Monetary Fund revised up the country's growthprospects by the biggest margin for any advanced economy, seeinggrowth of 1.4 percent this year and 1.9 percent in 2014.

Nonetheless, output remains well below pre-crisis levels, incontrast to other big economies, and the Bank of Englandbelieves the economy has plenty of scope to grow further withoutgenerating domestic inflation pressures.

This helps explain why BoE Governor Mark Carney pledged inAugust not to raise interest rates before the unemployment ratefell to 7 percent - something the bank forecasts will take threeyears - unless inflation threatened to get out of control.

"UK monetary policy settings for now are on auto-pilot ...so forward guidance is delivering the sort of boring certaintythe new governor was after," said David Tinsley, economist atBNP Paribas.

There was no marked move in the price of sterling or Britishgovernment bonds following the BoE's announcement that it waskeeping interest rates at 0.5 percent and leaving its totalasset purchases unchanged at 375 billion pounds ($597 billion).

In addition, the bank as usual made no statement alongsideits monetary policy announcement, and details of its discussionswill not be published until the release of minutes on Oct. 23.

While most private-sector economists think unemployment willfall rather more quickly from its current level of 7.7 percentthan the BoE expects, Tinsley said interest rates were unlikelyto rise any time soon.

"Even on an optimistic basis the UK labour market is notgoing to deliver an unemployment rate at 7 percent for six totwelve months at the very earliest, while inflationary pressuresare under control," he said.

Consumer price inflation currently stands at 2.7 percent,and has exceeded the BoE's 2 percent target since late 2009.

There are also some clouds on the horizon for Britain'srecovery.

An unexpected fall in August's industrial output has raisedquestions about whether the economy is expanding as rapidly asprivate-sector surveys have suggested, while there is also arisk that the U.S. government shutdown escalates into a defaulton government debt.

But more economic stimulus in Britain in the form of assetpurchases looks unlikely for now, as the two policymakers whobacked it earlier this year - Paul Fisher and David Miles - havesaid they would prefer to keep it in reserve in case the economyweakens.

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