Thursday, May 9, 2013

Bank of England maintains QE target, bank rate

    The Bank of England (BOE) held its official bank rate steady at 0.5 percent and its target for asset purchases financed through bank reserves at 375 billion pounds, as widely expected.
    The BOE has held its bank rate steady since March 2009, when it also started purchasing assets - known as quantitative easing - to hold down long-term interest rates. The target for asset purchases has been raised several times since then, most recently by 50 billion pounds in July 2012.
    The outgoing BOE governor, Mervyn King, and two other members of the bank's nine-member Monetary Policy Committee were defeated in their attempts in March and February to boost the size of asset purchases by 25 billion.
    The details of today's meeting will first be released on May 22 while the bank will publish its inflation outlook on May 15.
    The United Kingdom avoided slipping back into its third recession since the global financial crises as first quarter Gross Domestic Product rose by a quarterly 0.3 percent after contracting by 0.3 percent in the fourth quarter of 2012. On an annual basis, first quarter GDP rose 0.6 percent.

    Following the stronger-than-expected first quarter growth, economist had not expected the BOE to expand its asset purchases further.
    The BOE, along with the UK Treasury, also recently extended its Funding for Lending Scheme (FLS) by another year until January 2015. The scheme aims to encourage banks to lend to small businesses and the bank is hopeful this should encourage stronger growth.
     Inflation continues to remain above the BOE's 2 percent target. In March inflation was steady at 2.8 percent and last time it was below 2 percent was in December 2009.
    The BOE has acknowledged that inflation has remained "stubbornly above" target and expects it to rise further and remain above target for the next two years.
    Under its new remit, which was revised in March, the BOE was given more flexibility to disregard a temporary rise in inflation and use unconventional policy instruments to boost growth as long as inflation is trending toward target.
    The BOE was also given the freedom to use forward guidance and specific economic thresholds as a tool to affect consumers and markets expectations. The BOE will deliver an assessment of the use of such thresholds in August, the month after Mark Carney, currently Bank of Canada governor, takes over from King who is retiring.


Post a Comment