Bank of England policy makers have begun their last monthly meeting to determine the level of interest rates and money supply before an anticipated tight general election that will likely hinge on the fragile state of the British economy.
Amid cautious optimism about a sluggish recovery, they are widely expected to extend a yearlong record low in interest rates and leave the bank's billion-pound asset purchasing program on hold when they announce their decision Thursday.
While a raft of statistics has indicated that Britain's exit at the end of last year from its worst recession since World War II remains on track, there are worries that a public spending squeeze is making firms reluctant to invest.
"The recovery is set to remain fragile and sluggish," said David Kern, chief economist at the British Chambers of Commerce. "While the upturn in the service sector is gradually gathering momentum, the manufacturing sector is still struggling to enter the recovery phase."
"Any consideration of raising interest rates and withdrawing ... stimulus must be postponed until there is more conclusive evidence that growth is consolidating," he added.
The outlook for the British economy, the last major economy to return to growth after the global credit squeeze, is expected to dominate an election called on the eve of the two-day Monetary Policy Committee meeting by Prime Minister Gordon Brown for May 6.
So sensitive is the issue that the central bank has postponed next month's scheduled committee meeting and announcement, which was due on the same day as the election. It will instead be held May 7 and May 10.
Both Brown's Labour Party and the main opposition Conservative Party are trying to convince voters that they have a clear plan to reduce the country's massive budget deficit _ but both also acknowledge that no matter which party wins, Britons face a new age of austerity.
The Conservatives won a substantial amount of ground during the downturn, but Labour has clawed back some support since the end of the recession and opinion polls now point to the likelihood of a hung Parliament in which the Conservatives win a greater share of the vote, but not enough seats to secure an overall majority.
"The big issue is whether we can secure the economic recovery," Brown told lawmakers during his monthly question and answer session in Parliament on Wednesday.
Interest rates have been held at a record low of 0.5 percent for an unprecedented year as Britain tackled an 18-month long downturn during which around 1.3 million people were laid off and 50,000 families had their homes repossessed.
Gross domestic product contracted 6.2 percent from peak to trough, and many economists believe the government's forecast of growth of 1-1.5 percent this year and 3-3.5 percent next year is optimistic.
After interest rates hit a near-bottom, the central bank turned to a rarely used monetary policy lever _ it injected 200 billion pounds into the money supply via its so-called quantitative easing program of purchasing assets with newly created money.
The anticipated pause in action by the bank reflects growing optimism that the economy avoided a dreaded "double dip" recession in the first quarter of this year. Official GDP figures for the first quarter will be released later this month.
Recent positive revisions to the fourth quarter of 2009 have added to optimism, showing that Britain exited recession more strongly than first thought. The latest official figures showed growth of 0.4 percent in the quarter, compared to the first estimate of a paltry 0.1 percent rise.
A survey by the British Chambers of Commerce of more than 5,500 business released Wednesday showed that the recovery in the dominant services sector, which represents more than three quarters of GDP, gathered pace in the first quarter.
That was supported by a report from the Chartered Institute of Purchasing & Supply that showed that the sector is still expanding at a rapid pace, despite a fallback in March, which economists said could be attributed to comparison with a particularly strong February after January that was affected by heavy snow.
That bolstered a report on Tuesday from the Chartered Institute of Purchasing & Supply that suggested the hard-hit construction sector, which accounts for around 6 percent of GDP, grew for the first time in more than two years last month.
"When today's services data is combined with the encouraging manufacturing and construction PMI survey results, there is every reason to expect positive GDP growth in Q1 despite January's severe weather affecting output," said Hetal Mehta, senior economic adviser to the Ernst & Young Item Club economic consultancy.
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