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BoE Hold Off Stimulus On Inflation Fears

BoE Hold Off Stimulus On Inflation Fears

Despite a renewed contraction in the fourth quarter, the Bank of England policymakers decided to leave its asset purchase programme as well as record-low interest rates unchanged in the face of heightened inflation concerns and hopes of positive signs in the euro area underpinning the U.K. economy.

At the end of two-day meeting on Thursday, the Monetary Policy Committee voted to retain the asset purchase programme at GBP 375 billion. The previous change in asset purchases was in July, when it was raised by GBP 50 billion.

The committee decided to re-invest the cash flows of GBP 6.6 billion from the redemption of matured bonds in the asset purchase plan.

The nine-member panel also decided to hold the key interest rate at 0.50 percent. The current rate is the lowest since the central bank was established in 1694.

The Committee judged that its policy stance was fully consistent with the objective to deliver price stability. The MPC said it is ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.

"Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term," the BoE said.

At the January meeting, David Miles repeated his call for a GBP 25 billion increase in QE, while all other members saw limited stimulus to the economy from further easing.

Members discussed the appropriate policy stance to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. The minutes of the meeting is due on February 20.

The central bank says the economy is set for a slow but sustained recovery, aided by further easing in credit conditions. Inflation, at the same time, is expected to stay above the 2 percent target for the next two years. But bank estimates it to fall back thereafter to around the target.

The U.K. inflation rate was at 2.7 percent in December. The BoE's new estimates for inflation and GDP will be released with the Inflation Report on February 13.

The economy shrank 0.3 percent in the fourth quarter, making the modest recovery in the third quarter short-lived. The National Institute of Economic and Social Research this week downgraded its 2013 growth outlook to 0.7 percent.

As a silver lining in the cloud, the Funding for Lending Scheme is poised to boost lending and support the economy going forward.

Today, BoE Governor-designate Mark Carney played down speculation about a change in monetary policy.

"I have not made an assessment of the merits of altering the monetary policy framework in the UK and of course any change to the Monetary Policy framework would be the sole responsibility of HM government," he told lawmakers.

But he said it is important that policy framework is reviewed periodically. Further, he noted that a central bank should be flexible regarding the time horizon to return inflation to target.

by RTT Staff Writer

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