4th July 2013
The Bank of England Monetary Policy Committee in its first monthly vote under new boss Mark Carney has today maintained interest rates at 0.5 per cent and its quantitative easing programme at £375 billion writes Philip Scott.
Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the UK there have been further signs of a recovery, although it remains weak by historical standards and a degree of slack is expected to persist for some time.
Twelve-month CPI inflation rose to 2.7 per cent in May and is set to rise further in the near term. Further out, the BoE believes inflation should fall back towards the 2 per cent target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
Howard Archer, chief UK & European economist at IHS Global Insight says: “While the first MPC meeting under Mark Carney’s Governorship brought no change in monetary policy, it does appear that the committee are already moving towards more communication on their decisions and towards providing forward guidance on monetary policy. Significantly, the MPC issued a brief statement explaining their decision to sit tight on QE and interest rates, which was an unusual occurrence under Sir Mervyn King when policy was left unchanged.
“There have been high expectation that the Bank of England will adopt the policy of providing move towards forward guidance on monetary policy, especially as Mr. Carney is keen on this approach. With gilt yields having recently been sent significantly higher amid increased global financial market turmoil, the MPC likely felt it was a good move to make it clear at an early stage that any tightening in UK monetary policy is a considerable was off.
“All eyes will now be on the minutes of the July MPC meeting with the million dollar question being as to how did Mark Carney vote on quantitative easing? And if he was in favour of more QE, are there signs that he is getting other MPC members to come round to that view as well?”
Analysing the implications for sterling, Jason Gaywood, director of corporate services at foreign currency specialists at HiFX said: “Mark Carney wasted no time in stamping his authority as the new Governor of the Bank of England by providing far more content and colour alongside the monthly release of the Monetary Policy Committee’s decision on interest rates and quantitative easing.
“Traditionally, little information around the MPC’s thinking was shared until two weeks after the meeting when the minutes were released. In a break from tradition, Carney has flooded the Bank of England website with the reasoning behind maintaining the current level of QE and the holding of UK interest rates at 0.5% .
“It would appear that, despite signs of a broad recovery with several surveys showing increased business optimism coupled with the news that house prices are on the up to the tune of 3.7% since the same period in 2012, the ‘ultra low’ interest rate regime which has been with us since March 2009 shows no immediate signs of being tightened. Sterling dropped by as much as two cents or nearly 1.5% immediately after the release.”