UPDATE 2-UK central bank reinvests bonds, will buy more if needed
LONDON Feb 7 (Reuters) - The Bank of England voted on Thursday to reinvest government bond holdings that mature in March and promised to provide more stimulus if needed for an economy that was recovering only very slowly.
After a two-day meeting, the bank as expected kept its main interest rate at 0.5 percent and its target for gilt purchases at the previously agreed 375 billion pounds ($587 billion).
But to achieve that, the central bank will have to buy another 6.6 billion pounds' worth of gilts to offset the redemption in March of the bonds it has bought as part of its nearly four-year-old quantitative easing (QE) programme.
Unusually for a month with no change in policy, the BoE also issued a statement.
"The committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation," it said.
"The UK economy is set for a slow but sustained recovery in both demand and effective supply... But the risks are weighted to the downside, not least because of the challenges facing the euro area," it added.
The pound, which would suffer were the bank to flood the banking sector with yet more sterling by buying assets, slipped after the comments.
"Overall, this comes across to us as a fairly dovish statement," said Howard Archer, economist at IHS Global Insight.
"It reinforces our suspicion that the Bank of England will eventually decide to give the economy a further helping hand with another 50 billion pounds of QE sometime during the first half of 2013."
The bank's statement also tweaked its recent language on inflation, saying it might remain above its 2 percent target for the next two years but that it was appropriate to look past what the BoE said was a temporary phenomenon.
Britain's economy shrank again in the final quarter of 2012, coming closer to its third recession since the financial crisis.
In the latest indication of the state of the economy late last year, data showed on Thursday that industrial output rose a touch more than expected in December but still concluded its worst quarter since early 2009.
However, January surveys of businesses and households have pointed to a tentative economic recovery. A regular assessment by the National Institute of Economic and Social Research after the output data suggested the economy was flat in the three months to January - an improvement on its own and the official estimate of GDP in the three months to December.
While the BoE said it stood ready to buy more gilts if needed, next BoE governor Mark Carney gave no clear signal on whether he would push for more bond-buying by the central bank when he takes over in July.
Speaking before lawmakers in London, Carney said the BoE's existing policy stance might be enough to allow the economy to achieve sustainable growth, but he was ready to explore new policy options if needed.
That was in line with expectations that he will do more to support economic growth than his predecessor Mervyn King, though he rowed back from suggestions the bank should target it explicitly.
"We continue to expect modest further easing after he takes over in July, which should boost the growth outlook," said Rob Wood, economist at Berenberg Bank.
None of the 70 economists polled by Reuters last week had expected a change in interest rates or in the BoE's total QE target.
The BoE will release the minutes of its meeting on Feb. 20.
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