Bank of England leaves asset-buying scheme, rates unchanged

The Bank of England left its asset purchase programme intact at 200 billion pounds ($325 billion) and held interest rates at 0.5 percent on Thursday, as widely expected.

Policymakers have indicated they would not shift policy until at least February when they will get their new growth and inflation forecasts and the scheduled asset purchases run out.

Most analysts have concluded there will be no further increase to the scheme as the economy finally appears to be pulling out of the longest recession since World War Two.

It was the only realistic thing they could have done. The next big decision will be taken in February with the new inflation report, said Brian Hilliard, economic at Societe Generale. But cracks are already appearing in the committee and I don't think they will expand again.

The BoE launched its quantitative easing -- mainly asset-buying of government bonds with newly created money -- in March in an unprecedented attempt to boost an economy ravaged by a global credit crunch.

The economy is now showing signs of picking up again, house prices are rising and forward-looking surveys point to an ongoing recovery in activity.

But it still could be a long, hard slog and policymakers have said it will some time before levels of output get back to pre-crisis levels.

Interest rates are therefore likely to remain very low for some time, according to most analysts.

FISCAL WOES

Complicating the picture for the BoE is the outlook for fiscal policy. Britain's budget deficit is expected to near a record 13 percent of GDP in the current fiscal year.

But with an election due in less than six months, neither the Labour government nor the opposition Conservative Party, who are most likely to win, have spelled out exactly how they will bring the deficit down.

Finance minister Alistair Darling announced on Wednesday a tax hike for all but the poorest but that will come in only in 2011 and the consensus is that more will have to be done, probably in the form of savage spending cuts.

The Conservatives, for their part, have said they would bring the deficit down quicker but again with little detail, promising instead an emergency budget within 50 days of being elected.

We've got to keep interest rates as low as possible for as long as possible, George Osborne, most likely to be finance minister if the Conservatives win the election, told Reuters in an interview earlier on Thursday.

The lack of fiscal clarity and uncertainty over how quantitative easing affects the economy makes for a murky brew for the Bank of England to peer through.

The fiscal pain to come may well mean that the BoE has to compensate and keep rates lower for longer.

With fiscal retrenchment set for 2011, the BoE really does need to engineer a strong recovery next year to make sure the economy is in a fit state to cope, said Colin Ellis, economist at Daiwa Securities.

As such, the MPC may be about to face its greatest challenge to date - and if it does not want to flunk it, like the Bank of Japan arguably did, it needs to start setting out alternative policy options.

(Editing by Mike Peacock)