by Peter Barker

    LONDON, Dec. 25 (Xinhua) -- Minutes from December's Bank of England Monetary Policy Committee (MPC) meeting on Thursday showed all nine members agreeing to keep British interest rates at 0.5 percent and to keep to the 200 billion pounds (about 288 billion U.S. dollars) limit on quantitative easing (QE), but an increase in QE next year was not ruled out.

    Quantitative easing is where a central bank attempts to bolster an economy by very direct fiscal measures -- buying financial assets from banks. The aim is to increase the amount of cash in the banks, and therefore encourage them to lend more.

    The MPC had voted to increase the QE program by 25 billion pounds (about 36 billion dollars) at its November meeting. This was an increase on the program limit from 175 billion pounds (252 billion dollars) agreed in March 2009, when interest rates were slashed to 0.5 percent from 5 percent in October 2008. It is the first time QE has been tried in Great Britain.

    The MPC minutes for December outlined why they stuck at this level, but left the door open for further increases next year, with some members arguing for one now.

    In the minutes the committee said: "In November, the Committee had decided on and announced a 25 billion pound extension to its program of asset purchases that would take until the February MPC meeting to complete."

    "The medium-term outlook had changed little since then. For those members who had preferred a different policy action at the November meeting, a slightly different scale of asset purchases could still be justified. But the lack of significant news on the month meant that the case for deviating from the program of asset purchases announced in November was outweighed by the benefits of completing it as planned."

    Most members of the committee felt that there had been some positive developments in the economic outlook for the near term, albeit relatively minor ones by comparison to the uncertainties surrounding the medium-term outlook. The estimate of third-quarter GDP had already been revised up, to -0.3 from -0.4 percent and two weeks after the meeting to -0.2 percent.

    The MPC thought the mix of demand in the third quarter was consistent with greater momentum looking ahead. The decline in consumption and investment showed signs of stabilizing earlier than anticipated, and growth had yet to benefit from a stabilization of inventory levels.

    Businesses' capital market issuance had increased since late summer. The labor market had remained more resilient than might have been expected, which was consistent with survey evidence of a recovery in business optimism. And some of the macroeconomic data from overseas had been positive, especially in Asia.

    However, the MPC said there had been some less favorable developments. Money growth had been disappointing. And while the growth rate of households' and non-financial companies' money balances had held up better than aggregate broad money, it remained weak in absolute terms.

    The narrowing of the spread between gilt yields and corresponding Overnight Indexed Swap rates, which committee members had viewed as an indicator of the positive impact from the QE program, had partly reversed over the previous two months. The reasons for that were unclear, however, it remained likely that the full impact of the QE program on the economy would be felt only with a lag.

    The positive news about private final domestic demand in the Q3GDP release had been tempered by weaker exports than might have been expected in the light of sterling's depreciation and the bounce-back in world trade.

    Figures from the Office for National Statistics (ONS) released earlier this week showed that service sector growth is slowing, which added to concerns. Growth slowed to 0.1 percent in October from 0.5 percent in September after a fall in distribution services output.

    The slowdown was driven by a 0.4 percent fall in distribution -businesses such as retail - which grew 3.2 percent in September. The ONS also reported that productivity fell 0.1 percent in the third quarter.

    The Times, in London, quoted Jonathan Loynes, chief European economist at Capital Economics, as saying: "While it seems likely that the MPC is nearing the end of its measures to support the economy, further action is certainly possible if the recovery disappoints."

    The Bank of England Act 1998 gives the Bank of England operational responsibility for setting interest rates to meet the Government's inflation target. Operational decisions are taken by the MPC.

    The Committee meets monthly, and minutes of its meetings are released on the Wednesday of the second week after the meeting takes place. December's meeting took place on Dec. 7.

Special Report:  Global Financial Crisis