The markets are likely to be unsurprised by the revelation that the Bank OF England has voted to maintain interest rates at a record low of 0.5 percent.

The Monetary Policy Committee - headed up by Mervyn King - also decided to maintain QE stock at £325 bn, confirming the suspicions of many forex brokers and top industry experts.

Despite the UK’s declining GDP data - which showed Q1 growth of -0.2 percent compared to the previous month’s -0.3 percent - the committee have decided to refrain from a third round of easing measures following the £50bn injection of February.

Forex broker expectation had been divided prior to the announcement, with some analysts suggesting that QE was firmly on the table as a way to escape the gloomy outlook for many of Britain’s European peers. Others questioned the effectiveness of easing - two rounds of which have already been implemented - in the face of current decline.

It was certainly an instance of ‘To QE or not QE’, says Matthew Cheung, chief economist at the market analysts RANsquawk. “Rarely has the choice facing the MPC been tougher or more finely balanced. But with the spectre of inflation still looming large over the economy,” concludes Cheung, “in the event the MPC opted to sit on its hands for another month.”

Ian McCafferty (pictured), CBI Chief Economic Adviser, told this site: “The combination of sluggish activity and sticky inflation put the MPC in a difficult position, and this decision is likely to have been a close call. But it appears that the persistence of inflationary pressures tilted the balance in favour of keeping the stock of asset purchases unchanged.

“With economic conditions subdued, and signs of euro area tensions building again, another round of QE cannot be ruled out. But we expect the recovery to be on a firmer footing in the second half of the year, as inflation eases and the global economy strengthens.”

 The inflation and output projections to which McCafferty refers will appear in the Inflation Report to be published at 10.30am on Wednesday 16 May. And it appears that inflationary concerns remain at the forefront of traders’ minds when it comes to explaining the BoE’s decision.

Philip Rush, UK Economist at Nomura, said: "The Bank of England announced no change in policy, in line with the consensus expectation but contrary to our own (+£25bn). Disappointment at demand was overridden by inflationary concerns, at least for now.

“We welcome this decision to stop asset purchases as being less inconsistent with meeting the inflation target in the medium term."

"With the British economy slipping back into recession, and the headwinds from the euro zone getting steadily worse, the temptation to set the money presses rolling again was strong.”

While the BoE’s QE programme may be on hold for now, as ever, the MPC minutes on 23 May will be crucial, particularly regarding whether Posen or Weale stuck to their no-change position.

Also, as Caxton FX’s Richard Driver points out: “Next week’s Quarterly Inflation Report will be very important and seems likely to reveal stubborn price pressures are increasing the chances of UK inflation exceeding medium-term targets, which is the key motivation for the MPC voting against additional QE today. Nonetheless, there remains a very significant risk of further QE in the coming months,” adds Driver, “particularly if UK growth continues at the softer pace that was indicated by April’s figures. The extra bank holiday in the form of the Queen’s Jubilee will also weigh on the chances of UK growth bouncing back into positive territory on Q2.” 

For the time being, sterling has understandably rallied on the BoE news, hitting fresh highs towards €1.25. The pound is likely to remain in favour, at least until the MPC minutes are revealed in a fortnight. However, as Jeremy Boulton, FX analyst with Thomson Reuters comments. Sterling’s pop higher is essentially a drive to knock out a EUR/GBP barrier at 0.8000 (Matching low 0.8001) and not a lot more. “Undoubtedly investors are seeing safety in the pound,” says Boulton. “Yet today's action is seeing sterling longs taken on at bad levels. A successful mission to take out the barrier may well be followed by profit-taking. The reversal could be painful. Failure to trip the barrier is even worse, leaving specs badly stretched. Strong tech supports at 0.7795 and 0.7973 may offer some traders an opportunity to counter the post BOE move. After all, nothing has changed. The BOE did what was expected.”

Sarah Cox, Staff Writer