Thursday, September 5, 2013

Bank of England maintains QE target, bank rate

    The Bank of England (BOE) maintained its target for asset purchases of 375 billion pounds and its bank rate at 0.5 percent, as widely expected.
     In a brief statement following a meeting of the BOE's monetary policy committee, the U.K. central bank also said it had agreed to reinvest 1.9 billion of cash flows associated with the redemption of the September 2013 gilt - the British name for a UK government bond.
    Last month the BOE introduced its so-called forward guidance under which it pledged to maintain the bank rate at 0.5 percent and not reduce its target for asset purchases - known as quantitative easing - at least until the UK unemployment rate declines to 7.0 percent.
    Since then, the BOE's new governor, Mark Carney, has stressed that the BOE may provide more monetary stimulus if financial markets get ahead of themselves and raise market rates as this could threaten the tepid recovery.
    The rise in market rates has come against a backdrop of improving economic data and a perception that the BOE may tolerate higher inflation under its new policy of forward guidance. The BOE targets inflation of 2.0 percent but projections that it would rise above 2.5 percent, or that inflation expectations become unhinged, would "knock out" the 7.0 percent unemployment threshold.

   The UK unemployment rate has been steady around 7.8 percent for the last 10 months but the number of new claims for unemployment has been falling for the last nine months.
    The UK Gross Domestic Product expanded by 0.7 percent in the second quarter from the first for annual growth of 1.5 percent, up from 0.3 percent in the first quarter.
    Despite the relative high unemployment rate, inflation in the UK has been sticky, only falling to 2.8 percent in July from 2.9 percent in June, largely steady in the last 10 months.
    The BOE has held its bank rate at 0.5 percent since March 2009 when it also introduced the asset purchase scheme, which has been expanded on several occasions, most recently by 50 billion pounds in July 2012.


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