Thursday, June 5, 2014

BOE maintains rate, size of QE, as expected

     The Bank of England (BOE) left its benchmark Bank Rate at 0.5 percent and its stock of assets purchased at a 375 billion pounds, as widely expected, and made no further comments.
    The minutes of the meeting by the BOE's Monetary Policy Committee (MPC) will be published on June 18, shedding light on whether its members are starting to inch closer to raising rates.
    Minutes from the May meeting revealed that the discussion over direction of monetary policy had become "more balanced," a sign that some of the committee members are starting to consider raising rates in light of the improving U.K. economy and strong house price rises.
    The BOE has held rates at the current level since March 2009, when it also embarked on asset purchases - known as quantitative easing - to keep down long-term interest rates and thus encourage borrowing to stimulate economic activity.
    The U.K. Gross Domestic Product expanded by 0.8 percent in the first quarter of this year from the previous quarter for annual growth of 3.1 percent, up from 2.7 percent, the fastest growth rate of any advanced economy. The unemployment rate fell to 6.8 percent in March.

    The BOE has signaled that rates would first be raised at some point in 2015 when it is absolutely sure that the economy is on a firm footing and the recovery is not jeopardized by higher rates. And when it starts to raise rates, it has often said that rates will be raised gradually.
    After abandoning the unemployment rate as a guide to future monetary policy, the BOE is now using the slack in the economy as a gauge for deciding when it might be appropriate to raise rates.
    The margin of spare capacity is currently seen as between 1.0 and 1.5 percent of GDP, though the BOE readily admits that this is a very fuzzy and uncertain concept to accurately measure.
    But members of the BOE's policy committee clearly want to see further evidence of slack reducing before it is time to consider raising rates.
    Charlie Bean, BOE deputy governor for monetary policy, is one of the more vocal proponents for raising rates earlier rather than later.
    Last month Bean, who is retiring at the end of this month, told BBC radio on May 25 that there was no immediate need to raise rates and the BOE should be careful not to extinguish the recovery.
    However, Bean also said that the U.K. economy may not operate in the same way as it did before the financial crises and the impact of higher rates may be uncertain.
    In order not to fall behind the curve, Bean said it may therefore be necessary to raise rates a bit earlier and more gradually in order to gauge the impact on the economy.
    As BOE Governor Mark Carney has also said, Bean said the BOE's Bank Rate could eventually reach around 3.0 percent in 3-5 years, below its pre-crises average of around 5.0 percent due to some of the headwinds that will continue to face the economy for many years.
    While the UK economy is strengthening, inflation is currently in check, with inflation at 1.8 percent in April, the fourth consecutive month that it has been below the BOE's 2.0 percent target.


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