Thursday, April 4, 2013

BOE maintains bank rate, asset purchase target

    The Bank of England (BOE) maintained the official Bank Rate at 0.5 percent and its target for asset purchases at 375 billion pounds, as widely expected.
    In the BOE's March and February meetings, Governor Mervyn King and two other members of the nine-member Monetary Policy Committee were defeated in their attempts to expand the bank's asset purchase program, first launched in March 2009, by 25 billion pounds.
    It was the first meeting by the BOE's policy-making committee since the UK Chancellor last month expanded the bank's remit, giving it more flexibility and leeway to use "monetary activism"- to borrow George Osborne's phrase - and deploy new unconventional policy instruments to stimulate growth as long as inflation is trending toward the bank's 2 percent target.
    The BOE acknowledged in February that inflation had remained "stubbornly above" its target and was likely to rise further and remain above the target for the next two years due to higher regulated and administered prices and the decline in sterling's exchange rate.

    In February the UK inflation rate rose to 2.8 in February from  2.7 percent in the preceding four months. The last time it was below 2 percent was in December 2009.
    This morning sterling was trading around 1.51 to the U.S. dollar, above its a 2-1/2 year low of $1.4830 in mid-March, but down some 8 percent since January.
    The UK's Gross Domestic Product contracted by 0.3 percent in the fourth quarter from the third for an annual growth rate of 0.2 percent, down from 0.4 percent, flirting with the risk of a third recession since the global financial crises.
    The BOE has held its bank rate steady since March 2009.
    In addition to giving the BOE more flexibility to act when inflation is above its 2 percent target, which Osborne confirmed, the BOE was given freedom to start using forward guide to give markets a better idea of its future rate path. 
    Osborne also said the BOE could link this policy guidance to specific thresholds, for example unemployment as now used by the Federal Reserve. The BOE will give an assessment of the use of such thresholds in August, the month after Mark Carney, currently governor of the Bank of Canada, takes over from King.


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