Europe News

Bank of England keeps rates at 0.5%; ECB eyed


The Bank of England held interest rates at a record low as expected on Thursday, as the country's economy continues to hold up relatively well compared to its euro zone neighbors.

The central bank held its benchmark base rate at 0.5 percent, where it has been since March 2009, and maintained its asset purchase target at £375 billion ($564 billion)

Geoff Caddick | AFP | Getty Images

Sterling was steady after the decision, trading at slightly lower against the dollar at $1.50 and up against the euro, at 1.20.

Minutes from the bank's last meeting in December showed that policymakers remain divided on whether or not to hike interest rates in the U.K. Two of the nine members of the central bank's Monetary Policy Committee - Martin Weale and Ian McCafferty - again voted for an interest rate hike in December.

The bank has been reluctant to increase rates while wage growth in the U.K. remained under pressure, but data released in December showed that wages grew in the three months to October. While the U.K. economy looks relatively robust, the outlook for its European counterparts is not so rosy.

Growth remains low and data published on Wednesday showed the region's inflation rate fell into negative territory for the first time since 2009. The data adds more pressure on the European Central Bank to launch a U.S. Federal-Reserve-style bond-buying program when it next meets on January 22.

Given this backdrop of uncertainty, Chris Williamson, chief economist at Markit, said an interest rate rise in the U.K. could even be delayed until 2016.

"The slowdown in the economy towards the end of last year, coupled with worrying signs of economic stagnation and political instability in the euro zone, plus falling headline inflation, therefore supports the case for no immediate need to tighten policy," he said in a note Thursday.

"Rates look unlikely to start rising until the second half of the year, and could even be delayed until 2016 if the economic data deteriorate further in coming months."

However, "extraordinarily" low interest rates pose a risk to the long-term health of the economy, said the Institute of Directors after the Bank of England announced its decision.

"The longer that low rates persist, the more likely it is that the U.K. will face problems, as households and companies view extraordinary monetary policy as normal, and take on levels of debt which would be unaffordable with even modest interest rate rises," said the business lobbying group in a statement.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld