Central Banks

Bank of England holds firm ahead of tight UK election

How the UK elections may impact rates

The Bank of England kept monetary policy unchanged on Thursday, as investors focused their attention on next month's too-close-to-call general election.

The U.K.'s benchmark interest rate stayed at the record low of 0.5 percent, where it has stayed since March 2009. The central bank also held the size of its bond purchases under the quantitative easing program at £375 billion ($554 billion).

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This month's decision came ahead of a general election in May that is expected to be the closest-fought in generation. Forecasts suggest the Conservatives will emerge as the party with the largest number of seats after the election, but without an overall majority. This would potentially result in another coalition government, like the current Conservative-Liberal Democrat one.

Although the central bank has acted independently of the government since 1997, Societe Generale's Kit Juckes said a policy change this close the election was "unthinkable."

Instead, the bank is seen holding rates until inflation starts to recover, led by wage growth. The country is still in the grip of disinflation (falling inflation), with the consumer price index coming in unchanged in the year to February 2015, down from 0.3 percent in January—and well below the central bank's target of 2 percent.

The U.K. has however posted a respectable recovery in GDP growth, with its economy growing by 0.5 percent in the last three months of 2014 over the previous quarter. This equaled the U.S., and compared with 0.7 percent in Germany and 0.1 percent in France.

The next pre-election focal point will be the publication on April 22 of the minutes from this week's central bank meeting. This will reveal whether all nine members of the decision-making committee voted to keep rates unchanged.

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