The Bank of England (BoE) kept its monetary policy unchanged today as it worked on a new plan to steer interest rate expectations after its previous one was overtaken by Britain’s strong economic recovery.
The BoE left its Bank rate at 0.5 percent, where it has stood since the depths of the financial crisis in early 2009. Britain’s economy last year staged a surprise turnaround and markets are pricing in at least some chance of a rate hike late this year.
BoE governor Mark Carney and other policymakers have had to stress that they are in no rush to raise rates. There was little reaction in financial markets to the expected decision. The pound, which hit a seven-week low against the dollar yesterday, was flat on the day.
A plan announced by the BoE last August - not even to think about higher interest rates until unemployment fell to 7 per cent - has been rendered almost obsolete by a plunge in the jobless rate to just above that level.
The BoE is expected to give at least some clues as to its new guidance plan next Wednesday when the central bank publishes its quarterly economic forecasts and holds a news conference.
"There was an outside chance of the BoE delivering a post-meeting update in response to speculation about changes to their forward guidance," said James Knightley, economist at ING. "But it now looks as though an update on the situation will come with next week's inflation report."
Options include broadening the indicators used from the unemployment rate to possibly include wage growth, or copying the US Federal Reserve’s ‘dot chart’ - a published matrix of each policymaker’s view on future interest rates.
The BoE did not state in its policy announcement, as some traders expected it would, that it would reinvest proceeds of £8 billion worth of government bonds bought through its quantitative easing programme, which are due to mature a day after the next meeting in March.
Britain’s economy appears to have started 2014 on the same strong footing as in late 2013. “The strength of the growth story coupled with the robustness of the labour market means that the BoE are likely fighting a losing battle in convincing markets that rate hikes are a distant prospect,” said Knightley at ING.
The manufacturing and services industries showed strong growth in January, according to surveys this week. Data today showed new car sales and house prices rose more than 7 per cent in January compared with the same month last year. But some of the pressure on the BoE to show it will not be rushed into a rate hike has diminished. Inflation has eased to the Bank’s 2 per cent target and yields on 10-year gilts have slid to a three-month low as turmoil in emerging markets has prompted investors to buy safer securities.
Reuters
