(Adds market reaction, economist comment)
By Andy Bruce
LONDON, Sept 4 The Bank of England kept interest
rates on hold on Thursday as Britain's economy continued to
thrive, although risks to the recovery both at home and abroad
The BoE's Monetary Policy Committee (MPC) left its Bank Rate
at 0.5 percent, where it has been since the depths of the
financial crisis more than five years ago.
Investors will have to wait almost two weeks to find out if
any more policymakers voted in favour of raising interest rates,
after two of the nine MPC members broke ranks in August.
The BoE last month said it was watching for signs of pay
growth, which has been very weak, as it considers the best time
to start weaning the economy off low rates.
"A number of question marks surround the timing of the first
move," said Philip Shaw, chief economist at Investec.
"Much will depend on the dynamics of the incoming data and
whether the woes in the euro zone begin to have a more
significant impact on domestic activity."
Sterling fell slightly after the BoE decision, hitting a new
seven-month low against the dollar, while British government
bond futures also fell modestly - suggesting at least some
investors are starting to bet on an early rate hike.
With economic growth set to reach more than 3 percent this
year, economists polled by Reuters expect the BoE to raise
interest rates in early 2015 - probably a few months before the
U.S. Federal Reserve.
But there are risks to that view, both from home and abroad.
Activity in the services sector that dominates Britain's
economy grew at the fastest pace in a year in August, a survey
showed this week, suggesting no let-up in the pace of economic
recovery going into the final months of the year.
But waning growth in manufacturing added to a sense that the
recovery - while strong - is still too reliant on Britain's
big-spending consumers rather than business investment or
Scotland's independence referendum on Sept. 18 could deliver
the most immediate shock to the economy - a poll this week
showed support for independence at its highest ever level,
putting the outcome of the vote in doubt.
Goldman Sachs said on Wednesday that a vote for independence
would have "serious consequences" for both the Scottish and UK
economies, as the pound hit a new seven-month low against the
A stagnant euro zone economy, Britain's biggest export
market, is another cloud on the horizon for the BoE.
The European Central Bank faces market pressure to take
policy action to arrest an alarming decline in inflation. It
announces its monthly policy decision at 1145 GMT on Thursday.
Business surveys have also suggested the conflict in Ukraine
has impacted trade in Europe. Any further escalation could have
a tangible impact on economies across Europe, and therefore
further delay the BoE's exit from record low rates.
Further ahead, economists believe a British national
election in May next year could influence the timing of a rate
hike, even though MPC members are independent of political
With politicians at odds over whether the current government
should be credited with economic recovery or blamed for a
painful decline in living standards, the first interest rate
hike since 2007 will be in focus in a likely close election
The BoE said on Thursday it was keeping its stock of assets
amassed under its quantitative easing programme at 375 billion
pounds, and would reinvest 14.4 billion pounds of a gilt
maturing this month.
(Reporting by Andy Bruce; editing by William Schomberg and Hugh