BOE Keeps QE on Hold as Officials Assess Forward GuidanceJennifer Ryan and Scott Hamilton
The Bank of England left its bond-buying program on hold today as Governor Mark Carney trains officials’ focus on providing forward guidance on policy to cement the economic recovery.
Armed with new quarterly economic forecasts, the nine-member Monetary Policy Committee held the target of its quantitative-easing program at 375 billion pounds ($571 billion), as forecast by all but one of 42 economists in a Bloomberg News survey. It also kept the benchmark interest rate at 0.5 percent, a record low.
Carney took over from Mervyn King last month and will present the MPC’s review of steering policy expectations next week after saying in July that changes in bets on future interest rates were “not warranted.” With the U.K. economy strengthening and the euro-area recession showing signs of easing, that may add to the case for holding stimulus and focusing on giving companies and households certainty about rates to encourage spending.
“It was always looking likely to be a non-event ahead of the announcement about forward guidance,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former BOE official. “Recent economic news has supported the MPC’s forecast for a gradual recovery. Even though the committee might return to the QE option further ahead if the recovery wobbles, we think that it will prefer to wait to see what impact forward guidance has.”
The pound strengthened for the first time in eight days versus the euro and erased its decline against the dollar after the decision. Sterling appreciated 0.7 percent to 86.89 pence per euro as of 12:47 p.m. London time, after weakening to 87.70, the least since March 12. It added 0.2 percent to $1.5231.
Carney’s first policy decision on July 4 marked the 319-year-old central bank’s first steps into guidance, with the MPC issuing a statement that investors’ expectations of when the BOE would begin rate increases were premature.
European Central Bank President Mario Draghi pledged the same day to keep rates low for an “extended period.” The ECB kept its key rate at a record low 0.5 percent today, as predicted by all but one of 63 economists in a survey.
The MPC’s statement was a response to a jump in bond yields sparked by Federal Reserve Chairman Ben S. Bernanke’s June 19 comments on the timing for unwinding QE in the U.S. The increase represented an “unwelcome tightening in monetary conditions” that could scupper the recovery, the BOE said.
The Fed said yesterday that persistently low inflation could hamper the economic expansion and pledged to keep buying $85 billion in bonds every month.
Since the MPC’s July decision, reports have shown the recovery gained traction. The economy expanded 0.6 percent in the second quarter and unemployment claims fell at the fastest pace in three years in June. Reckitt Benckiser Group Plc, the maker of Nurofen painkillers, said on July 29 that sales growth this year will be at the higher end of its forecast range.
A report today showed a manufacturing index rose more than economists forecast to a 28-month high in July.
Still, credit data show that lending remains weak, suggesting further measures are needed to complement the BOE’s Funding for Lending Scheme. Mortgage approvals dropped in June and business lending fell 1.3 billion pounds.
Carney joined the BOE from the Bank of Canada, where he introduced forward guidance in 2009, and now must fulfill a directive from Chancellor of the Exchequer George Osborne to assess introducing the strategy in the U.K. He’ll present the bank’s analysis on Aug. 7 along with new economic forecasts.
The BOE said in the minutes of its July meeting that the findings would have an “important bearing” on today’s decision, though any announcement on guidance or thresholds will be made next week. The minutes also showed MPC members Paul Fisher and David Miles dropped their call for more quantitative easing in favor of a “mixed strategy.”
“It is getting increasingly hard not to judge that the U.K. growth outlook is at an inflexion point, or even perhaps at ‘escape velocity’ as Mark Carney describes it,” said David Tinsley, an economist at BNP Paribas in London. “Increasingly the talk is going to be of policy’s role in sustaining the recovery rather than in trying to get growth moving.”
The MPC’s vote for no change last month was unanimous, ending an eight-month stretch of split decisions. Minutes of today’s meeting will be published Aug. 14.