Friday 15 December 2017

Bank of England holds steady on rates as economy picks up

Bank of England governor Mark Carney
Bank of England governor Mark Carney

The Bank of England left monetary policy unchanged on Thursday, sticking to its plan to keep interest rates at a record low until the country's surprisingly fast economic recovery broadens out.

Britain has moved from a laggard to a leader in terms of growth among the world's biggest economies last year.

Its economy is expanding by more than 3pc in annualised terms although there are concerns the recovery could prove unsustainable, especially as wage growth remains weak.

The BoE said in August it will not think about raising rates until unemployment falls to 7pc. Since then unemployment has come down much faster than the Bank expected, raising questions about how long it can hold off on raising rates.

But inflation has also fallen to within a whisker of its 2pc target, reducing the pressure on the BoE.

At its two-day meeting which ended on Thursday, the Bank's Monetary Policy Committee kept interest rates at 0.5 percent, as expected by all the economists who took part in a Reuters poll.

It also left its bond-buying programme unchanged at £375bn (€453bn).

The MPC issued no statement after its announcement.

The turnaround in Britain's economy contrasts with the situation in the euro zone, its main trading partner, where the European Central Bank is expected to use a news conference on Thursday to remind investors it could ease policy further.

The pace of Britain's recovery has helped the pound to strengthen by 5pc against the euro and 10pc against the dollar since the middle of last year.

Governor Mark Carney has sought to dampen speculation about an early rate rise, stressing how Britain's economy remains 2pc smaller than before the financial crisis, unlike many other industrialised nations which are now bigger than in 2008.

Carney and other policymakers have said repeatedly that the 7pc threshold is not an automatic trigger for a rate hike.

But with unemployment falling to 7.4pc at its most recent reading and expected to drop further in coming months, some economists say the BoE will have to tweak its guidance on when it will start to consider raising interest rates.

In a Reuters poll published last week, 13 of 41 economists said the BoE would need to lower its 7pc jobless rate threshold. A month earlier, only six of 53 expected the Bank to make such a move.

Carney has stressed that the BoE has a range of tools it can use to tackle any problems in Britain's fast-recovering housing market, such as curbs on mortgage lending, without resorting to the "blunt instrument" of raising interest rates.

Data published earlier on Thursday showed the trade deficit, another weak point of Britain's recovery, barely narrowed in November although exports to its main trading partners in the euro zone picked up.

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