Thursday, April 10, 2014

BOE maintains base rate, asset purchases, as expected

    The Bank of England (BOE) maintained its Bank Rate at 0.5 percent along with its current stock of assets at 375 billion pounds, as widely expected.
    As usual, the central bank of the United Kingdom added in its brief statement that its decision was taken in the context of its monetary policy guidance from August.
    In August the BOE said it would not raise its base rate, unchanged since March 2009, until the UK unemployment rate fell to 7.0 percent. But due to a faster-than-expected decline in unemployment along with a stronger recovery in the UK economy, the BOE in February revised its forward guidance.
    Instead of tying its monetary policy stance to a single economic indicator, the BOE said it would only raise rates when there was less slack in the economy and pointed to 18 different economic indicators that it would be watching to gauge the level of slack in the economy.
    The UK unemployment rate remained steady at 7.2 percent in the three months to January from the previous three months while Gross Domestic Product expanded by 0.7 percent in the fourth quarter of 2013 from the third quarter for annual growth of 2.7 percent, up from 1.8 percent.
    In addition to the slack in the economy, the BOE is also basing its policy stance on keeping inflation around its 2.0 percent target.  In February inflation fell to 1.7 percent, taking any pressure off the BOE of having to respond to inflationary pressures with tighter policy.
    Inflation had remained above the BOE's target since late 2009 but finally fell below 2 percent in January. In 2013 inflation averaged 2.6 percent, down from 2.8 percent in 2012. This year and in 2015 the International Monetary Fund (IMF) forecast average UK inflation of 1.9 percent.
    The UK economy is forecast to expand by 2.9 percent this year by the IMF after 1.8 percent growth in 2013, illustrating the country's swift economic recovery.
    But BOE officials, including the governor Mark Carney, have frequently underlined that they will not raise rates until they are absolutely sure the recovery of the economy is on firm ground.
    Financial markets first expect the BOE to raise rates in 2015.


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