BOE Sticks to Guidance Plan With Key Rate Kept at 0.5%
The nine-member Monetary Policy Committee led by Governor Mark Carney kept the key interest rate at a record-low 0.5 percent and its bond-buying program on hold at 375 billion pounds ($598 billion), as forecast in two Bloomberg News surveys of economists. The BOE introduced forward guidance in August, saying it will keep borrowing costs on hold until late 2016.
The panel was unanimous on the policy stance last month and its position may be further cemented by recent surveys pointing to accelerating growth in the third quarter. Signs of a pickup have prompted officials to set aside concerns expressed in August, when Carney introduced forward guidance, that the recovery may need further aid.
“The recent data have been buoyant but it’s a marathon, not a sprint,” said Alan Clarke, an economist at Scotiabank in London. “They’ll probably bring forward their projection for unemployment to reach the 7 percent threshold at next month’s forecasting round.”
The MPC met Oct. 8 and 9, a day earlier than normal, to allow Carney to travel to Washington to join global counterparts at International Monetary Fund meetings.
The pound was little changed versus the dollar after the decisions. It traded at $1.5946 as of 12:21 p.m. London time after earlier falling to $1.5914, the lowest since Sept. 18. The yield on the 10-year gilt rose 4 basis points from yesterday to 2.72 percent.
The BOE decision follows the European Central Bank’s announcement last week that it would leave its main refinancing rate at a record low of 0.5 percent. The ECB has also implemented guidance, pledging in July to keep borrowing costs low for an extended period, without specifying a time frame.
In Bloomberg surveys published today, a majority of economists said the ECB’s next monetary-policy move will be a non-standard one. While almost three quarters of economists predict it will unveil new liquidity measures such as longer-term refinancing operations, a majority say interest rates will remain unchanged through the first half of 2015.
Under the BOE’s guidance policy, the MPC said it won’t consider raising its key rate at least until unemployment falls to 7 percent from 7.7 percent, which it forecasts may not happen until late 2016. The policy has three caveats linked to inflation expectations and financial stability.
Carney said in an interview last month that he doesn’t see an argument for expanding quantitative easing again, and minutes of the MPC’s September meeting showed all nine members agreed that the current policy setting was appropriate. Minutes of this week’s meeting will be published Oct. 23.
Policy maker Paul Fisher said on Oct. 2 that guidance is supporting the real economy, and market expectations that the BOE will increase rates sooner than projected don’t suggest it has failed. His colleague David Miles said the recent strengthening of the economy doesn’t signal an early tightening.
“It would be spectacularly misguided to think that some signs of more normal growth mean that the economy is back to normal,” Miles said Sept. 24. Both officials had been voting for more stimulus until July, when Carney joined the BOE.
“Policy is on autopilot,” said David Tinsley, an economist at BNP Paribas SA in London and a former central bank official. “Inflation could conceivably be a concern in a year’s time or so if consumption growth continues to strengthen, but right now that’s not a worry either.”
The IMF raised its forecast for U.K. growth this week, and now sees expansion of 1.4 percent in 2013 and 1.9 percent next year. The National Institute for Economic and Social Research estimates third-quarter growth of 0.8 percent, up from 0.7 percent in the April-June period.
As the economy has strengthened so too has the property market, helped in part by government measures. Prime Minister David Cameron bought forward to this month a program to help boost mortgage lending. Help to Buy provides government guarantees allowing house purchases with smaller deposits, raising criticism that the plan will stoke a bubble.
While most reports have pointed to a strengthening recovery, there are signs it remains uneven. Data yesterday showed industrial output unexpectedly dropped 1.1 percent in August, with factory production falling 1.2 percent.
The MPC are also having to consider the potential risks from the U.S. budget impasse. The government shutdown resulting from the fiscal standoff between President Barack Obama and the Republicans has lingered into a second week and the Treasury Department has set an Oct. 17 deadline for Congress to raise the country’s $16.7 trillion debt ceiling.
Also in the U.S., minutes of the Federal Reserve’s Sept. 17-18 policy meeting showed most officials said the central bank was likely to taper its bond purchases this year. The Fed unexpectedly refrained from such a move in September, and the minutes, published yesterday, said the decision was a “relatively close call” for several policy makers.
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