Thursday, May 8, 2014

BOE maintains rate, stock of assets, as expected

    The Bank of England (BOE) maintained its bank rate at 0.5 percent and the stock of assets purchased at 375 billion pounds, as widely expected.
    But unlike its statements in recent months, the BOE omitted the phrase that the monetary policy decision was taken in the context of the guidance from August.
    This reflects the fact that the U.K. unemployment rate fell to 6.9 percent in the three months to February, below the BOE's earlier threshold of 7.0 percent before it would consider any rate change.
    Due to faster-than-expected growth and an improvement in the labour market, the BOE in February revised its previous rate guidance from August.
    Instead of basing its monetary policy stance on a single economic indicator, such as the jobless rate, 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 slack.
    In addition, the BOE's policy stance will also rest on keeping inflation around the bank's 2.0 percent target. The headline inflation rate in the United Kingdom eased further to 1.6 percent in March, the sixth consecutive month of decelerating prices.

    Inflation had remained stubbornly 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.
    BOE officials, including Governor Mark Carney, have frequently stressed that they will not raise rates until they are absolutely sure that the recovery of the UK economy is assured.
    The U.K. Gross Domestic Product grew 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 in the fourth quarter.
    Earlier this week the Organization for Economic Cooperation and Development (OECD) raised its estimate for UK economic growth this year to 3.2 percent from 2.4 percent forecast in November, and forecast 2015 growth of 2.7 percent, up from a previous estimate of 2.5 percent.
    But the OECD also cautioned that policy makers should take action over rising house prices, with tighter monetary policy from around mid-2015 accompanied by prudential measures to tackle the risk from excessive home price inflation.
    Jon Cunliffe, one of the BOE's deputy governors, on May 1 also pointed to the risk to financial stability from rising property prices, saying the BOE's Financial Policy Committee - responsible for ensuring financial stability - needs to "be both vigilant and ready to act."  
    In its brief statement, the BOE added that its latest economic projections would be published on May 14 while the minutes of its meeting would be published on May 21.
    The BOE has maintained its rate since March 2009 when it also embarked on the purchase of assets to hold down long-term rates and help stimulate economic activity.


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