BOE Officials See No Case for More Stimulus
Bank of England policy makers voted unanimously to keep policy unchanged this month as an improving economic outlook prompted agreement that no more stimulus was needed.
In a switch from August, when some Monetary Policy Committee members saw a “compelling” case for a loosening of policy, the minutes of the Sept. 3-4 meeting showed that “no member judged that further stimulus was appropriate at present.” The pound rose.
“Domestically, there were increased signs that the recovery was taking hold,” the BOE said. Recent data “presented an upside risk to the growth profile” published in the central bank’s August Inflation Report.
Britain’s economy has shown increased signs of strengthening, and BOE staff now estimate growth of 0.7 percent this quarter, up from 0.5 percent last month. The MPC, led by Governor Mark Carney, introduced forward guidance last month, pledging to keep interest rates low until the unemployment rate falls to 7 percent. It was 7.7 percent in the three months through July.
While the MPC forecast last month that the jobless rate won’t reach the threshold until late 2016, investors are betting that it will have to increase its key rate sooner. The MPC noted the “upward movement” in sterling market interest rates and an increase in gilt yields, which it said was partly due to the stronger economy.
The pound extended its gain against the dollar after the minutes were released, rising to $1.5971, the highest since Jan. 18. It was trading at $1.5969 as of 10:07 a.m. London time, up 0.4 percent on the day. The implied rate on the short-sterling contract maturing in December 2014 rose to 0.97 percent from 0.91 percent before the minutes were published.
“The U.K. economy is gaining momentum and the unemployment rate will fall more quickly than the Bank of England predicts,” said James Knightley, an economist at ING Bank NV in London. “Our best guess on the first rate hike remains early 2015 rather than late 2016 as the BOE suggests.”
Signs that the BOE is shifting away from adding to stimulus come as U.S. Federal Reserve policy makers meet to discuss their bond-buying program.
The Federal Open Market Committee will probably conclude a two-day meeting today by dialing down monthly Treasury purchases by $5 billion to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg News survey of economists. The FOMC has pledged for more than a year to press on with bond buying until achieving substantial labor market gains.
The U.K. central bank’s guidance policy includes three knockouts, two of which are linked to inflation. While the MPC said in the minutes that none of the conditions had been breached in the past month, it noted potential upward near-term pressure on inflation from an increase in oil prices. It added that some of this pressure may be offset by the recent appreciation of sterling.
“Guidance remained in place and no MPC member thought it appropriate to tighten the stance of policy at the current juncture,” the BOE said. “Members had different views about the extent to which a further loosening of the monetary stance might be warranted.”
These differences were in part based on the outlook for slack in the economy, which the BOE said was “difficult to judge.”
The BOE also said that there were “tentative signs” that the degree of spare capacity in companies “might be beginning to diminish.” It added it was still too early to assess how likely it was that the effective supply capacity would increase as demand recovered.
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