Thursday, November 7, 2013

UK central bank maintains asset purchase target, rate

    The Bank of England (BOE), as widely expected, maintained its bank rate at 0.5 percent and the target for asset purchases at 375 billion pounds, adding in a brief statement that this decision was reached in the context of the monetary policy guidance announced in August.
    The BOE said in August that it would not reduce its purchases of assets, such as bonds issued by the UK government, until the unemployment rate falls to 7.0 percent.
    The BOE's latest economic will be released on Nov. 13, the BOE added.
    Based on an improving economy and minutes from the BOE's October meeting, financial markets expect the BOE to update its economic projection to show unemployment falling to 7 percent before the second quarter of 2016, as it projected in the August inflation report.
    The UK unemployment rate was steady at 7.7 percent in August and July, but economists now expect the rate to fall to the BOE's threshold by the end of 2015 and thus start thinking of raising its policy rate that has been unchanged since March 2009.

    Illustrating the growing belief that the BOE will start to tighten policy sooner than expected, the National Institute of Economic and Social Research (NIESR) this week said the BOE was likely to raise rates in the second half of 2015, before unemployment hits the 7.0 percent threshold.
     The minutes from the October meeting by the BOE's Monetary Policy Committee showed that the slack in the UK economy was being eroded "a little faster than envisaged" in August and this could lead to unemployment falling faster than expected.
    The minutes also showed that no MPC members saw any reason to tighten policy at this stage.
    The UK's Gross Domestic Product expanded by an annual 1.5 percent in the third quarter, faster than the second quarter's pace of 1.3 percent and the first quarter's 0.2 percent. Inflation was steady at 2.7 percent in September and August.
    Although the BOE in August set out a 7.0 percent unemployment rate as a threshold, it also said that its policy rate would not automatically be raised if the rate falls to that level, nor was it a target for unemployment, describing the 7.0 percent as a "way station" at which it would reassess policy.
    The BOE has held its target for asset purchases - known as quantitative easing - steady since July 2012.
    In its latest forecast, the International Monetary Fund revised upwards its forecast for UK economic growth to 1.4 percent this year from a previous forecast of 0.7 percent, and 1.9 percent in 2014, up from a previous 1.5 percent.



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