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BoE Holds Rates as Mervyn King Bids Farewell


The Bank of England on Thursday voted to keep benchmark interest rates unchanged at 0.5 percent at Mervyn King's final monetary policy meeting as Governor.

(Read More: Bank of England's King Plans to Waltz Into the Sunset)

The central bank opted to keep the size of its asset purchase program unchanged at 375 billion pounds ($574 billion), as well as maintain its record low interest rates.

The move — or lack thereof — came as no surprise to economists and former colleagues of King.

"Entirely predictable! Sir Mervyn said he wanted to make monetary policy boring, and he has now succeeded," said Andrew Sentance, previously a member of the BoE's Monetary Policy Committee, in a Twitter post after the announcement.

Stephen Gifford, director of economics at the Confederation of British Industry, said the decision to hold off on further monetary stimulus was to be expected, given evidence of a "budding recovery". The U.K. posted better-than-expected growth of 0.3 percent in the first quarter, while PMI (Purchasing Managers' Index) data for May also topped forecasts.

(Read More: UK Economic Growth 'Will Top Expectations')

"Despite this week's disappointing lending figures, conditions should continue to improve as the Funding for Lending Scheme gains traction, which will further support household and business spending," Gifford said in a note on Thursday.

However, markets still reacted to the news, with sterling hitting a four-week high of $1.55 versus the dollar.

Despite confidence in the improving economy, Howard Archer, the chief U.K. and European economist at IHS Global Insight, said more stimulus action was on the cards, given waning inflation pressures.

"We still think it is more likely than not that the Bank of England will take further stimulative action over the coming months, most likely in the form of a further 25 billion pounds of quantitative easing sometime in the third quarter," Archer said in a note.

"Upside risks to inflation appear to have eased recently, due to the overall marked retreat in oil and commodity prices, persistent low wage growth and moderating household inflation expectations. This gives the Bank of England more scope for stimulative action."

In recent months, King has regularly been one of three Monetary Policy Committee members to vote for any expansion in bond purchases, but been outvoted by other members.

King Quits Bank After 20 Years

King's departure will be the end of an era, as the now-grey haired economist has served at the Bank of England for over 20 years, starting out as a non-executive director in 1990.

(View More: King's Legacy Overshadowed by Financial Crisis?)

Despite his long tenure, King's legacy is likely to focus on his management of the 2007 financial crisis, whose after effects continue to reverberate globally.

Charles Goodhart, a former colleague of King's at the Bank of England, told CNBC that history would conclude that King focused on monetary policy to the detriment of financial stability, in common with other central bankers of the era.

(View More: Was BoE's Mervyn King a Tyrant?)

"I think they will say he did remarkably well in running the inflation target, but that like virtually everybody else, including his entire central bank cohort, he did not see and initially found it rather difficult to deal with the banking crisis," said Goodhart, who was previously chief adviser to the Bank of England's Monetary Policy Committee.

Goodhart named Federal Reserve Chairman Ben Bernanke as another central bank chief who had failed to recognize the dangers of deregulating the financial sector.

"Financial stability is on everybody's lips nowadays, but then, people thought there was not a problem with stability, nobody did," he said.

"Remember that regulation of the banks had been removed from the Bank of England, and put with the FSA [the now-defunct Financial Services Authority] by the Labour government in 1997. So the Bank of England did not actually have detailed information about the condition of individual banks. That said, and I am sure Mervyn would agree — in fact he has several times said — that he should have shouted louder about the weaknesses."

(View More: CNBC Looks Back on Mervyn King's Career)

Goodhart said history would judge King's creation of the BoE's 2 percent inflation target as his finest hour, but added that King erred in overestimating monetary policy's success in managing price rises.

"We overplayed the role of monetary policy in keeping inflation down in the period up until 2007, and underplayed the role of China. I think we thought monetary policy was being more successful that it actually was, and underplayed the degree to which a housing and financial bubble was developing, which could be potentially dangerous," he said.

Ex-Bank of Canada Governor Mark Carney will replace King on July 1 2013, and has agreed to serve for five years.

(Read More: Currency War Could Heat Up When Carney Joins BoE)

Goodhart and Archer concurred that Carney was "lucky" to be joining the Bank just as the U.K.'s economic outlook was improving.

"Napoleon used to say he wanted his generals to be lucky rather than good and one of the great advantages, I think, of Mark Carney, is that he is lucky. I think he is going to arrive at the U.K. just as it is recovering and I do not think he is actually going to have to do very much… and if we can get a lucky Bank governor that will be splendid," said Goodhart.

Archer added that the recent stream of improved economic data had eased pressure on Carney to act as soon as he takes over, and that he was unlikely to lower interest rates below 0.5 percent.

However, Goodhart and Archer agreed that Carney was likely to change the Bank's forward guidance on interest rates.

"I think he will do that in a way which makes the expectations of what is likely to happen much clearer and he may do the kind of conditional guidance the Fed has already introduced, although not in exactly the same way," Goodhart said.

—By CNBC's Katy Barnato

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