Forex News – Bank of England keeps rates steady in line with guidance
October 10, 2013 1:01 pm
The Bank of England kept its key benchmark rate at 0.5% during its meeting, as well as leaving the size of its asset purchase program unchanged at 375 billion pounds. The decision was in line with market expectations and caused little movement in the British Pound.
The Bank of England also maintained its forward guidance – that was adopted in August of 2013 – by which the interest rate will remain at the current low level of 0.5% while the unemployment rate stays above 7%. The latest available unemployment rate (May – July 2013) was 7.7%. Private economists expect the 7% level to be breached as soon as 2014, whereas the Bank of England forecasts a longer time horizon for this level to be met.
The markets are optimistic that the UK economy will perform reasonably well and this has benefited sterling in the last 3 months or so. Statements by the Bank’s new governor Mark Carney that he saw no need for additional bond purchases also contributed to this strength. In its latest World Economic Outlook, the IMF revised its growth forecast for the UK sharply higher to 1.4% for 2013 and 1.9% for 2014 compared to its previous forecasts in July of 0.9% and 1.5% respectively. The IMF also forecasts inflation to remain above the 2% central target of the Bank, at 2.7% during 2013 but to move towards that target in 2014 at 2.3%.
To sum up, despite the significant challenge of deleveraging the UK financial sector and the pledge to keep rates low, the Bank of England could be forced to tighten policy if unemployment goes down faster than expected, if inflation remains stubbornly high or if a continued rise in house prices starts to cause fears about financial stability.
The Bank of England kept its key benchmark rate at 0.5% during its meeting, as well as leaving the size of its asset purchase program unchanged at 375 billion pounds. The decision was in line with market expectations and caused little movement in the British Pound.
The Bank of England also maintained its forward guidance – that was adopted in August of 2013 – by which the interest rate will remain at the current low level of 0.5% while the unemployment rate stays above 7%. The latest available unemployment rate (May – July 2013) was 7.7%. Private economists expect the 7% level to be breached as soon as 2014, whereas the Bank of England forecasts a longer time horizon for this level to be met.
The markets are optimistic that the UK economy will perform reasonably well and this has benefited sterling in the last 3 months or so. Statements by the Bank’s new governor Mark Carney that he saw no need for additional bond purchases also contributed to this strength. In its latest World Economic Outlook, the IMF revised its growth forecast for the UK sharply higher to 1.4% for 2013 and 1.9% for 2014 compared to its previous forecasts in July of 0.9% and 1.5% respectively. The IMF also forecasts inflation to remain above the 2% central target of the Bank, at 2.7% during 2013 but to move towards that target in 2014 at 2.3%.
To sum up, despite the significant challenge of deleveraging the UK financial sector and the pledge to keep rates low, the Bank of England could be forced to tighten policy if unemployment goes down faster than expected, if inflation remains stubbornly high or if a continued rise in house prices starts to cause fears about financial stability.
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