Bank of England policy makers extended unprecedented stimulus into a sixth year today as they seek to ensure the economy fully recovers from the damage wrought by the financial crisis.
The Monetary Policy Committee led by Governor Mark Carney held its benchmark interest rate at 0.5 percent, as predicted by all 52 economists in a Bloomberg News survey. The central bank has maintained borrowing costs at a record low since March 2009, the longest stretch of unchanged policy since the 1940s. It also said today it will reinvest funds from gilts in its asset-purchase facility that mature tomorrow.
Carney says there’s “no rush” to remove the emergency stimulus put in place by his predecessor Mervyn King, even after the strongest expansion since 2007 pushed unemployment toward the 7 percent level at which officials had said they’d consider a rate increase. With signs the recovery is becoming entrenched, traders are betting the BOE will lift borrowing costs next year after officials raised their growth forecasts last month.
“The economy is in a sweet spot for now,” said David Tinsley, an economist at BNP Paribas SA in London. “It will take some kind of shock to change that happy circumstance. That could come eventually from firmer inflationary pressures, or conversely a weakening in the activity outlook. For now though, it’s ‘as you are’.”
The economy was 1.4 percent smaller in the fourth quarter than at its peak in early 2008, supporting the BOE’s view that there is enough spare capacity to keep rates on hold without fueling faster inflation. Only Italy is further behind the U.K. among Group of Seven nations.
This month is also the fifth anniversary of the asset-purchase plan, under which the BOE has bought 375 billion pounds ($627 billion) of government bonds. It announced the last round of quantitative easing in July 2012 and left the program unchanged today.
In line with its forward-guidance policy, the BOE will reinvest 8.1 billion pounds from a March 2014 gilt. It said it will begin purchases on March 10 and that the range of debt eligible in the operations will remain unchanged.
Britain’s emergency stimulus has helped to lower government borrowing costs, which act as a benchmark for commercial loans. The 10-year gilt yield has averaged 2.84 percent over the past five years compared with 3.6 percent when QE was introduced. Equivalent German yields averaged 2.33 percent in the period.
The European Central Bank kept its benchmark rate at a record-low 0.25 percent today, as forecast by 40 out of 54 economists in a Bloomberg News survey. President Mario Draghi will hold a press conference at 2:30 p.m. in Frankfurt.
The BOE will increase the key interest rate by 25 basis points by May 2015, according to one-month forward contracts for the sterling overnight interbank average, or Sonia. Chief Economist Spencer Dale and fellow MPC member Martin Weale said last month it was reasonable to think a rate increase may come in the spring next year.
The benchmark rate has remained unchanged for the longest period since the 12 years between 1939 and 1951, when it was 2 percent, according to BOE data. The longest stretch was the 103 years to 1822, which encompassed the Battle of Waterloo.
While savers have criticized the BOE’s stimulus policy for costing them millions of pounds of interest income, officials say not implementing it would have meant a deeper recession. Five years ago, Britain was mired in the biggest slump since World War II -- economic output shrank 7.2 percent in total -- and the FTSE 100 Index of stocks had plunged 14 percent in the first two months of the year.
“We were trying to offset the risk of the economy moving into some appalling downward spiral,” Kate Barker, who was on the MPC at the time, said in a BBC interview yesterday. “I hope we see interest rates going up in a year’s time. That will mean for me that the economy is getting stronger.”