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BoE Resists Additional QE, Keen On Future Rate Guidance Under Carney


Bank of England policymakers kept quantitative easing and interest rate unchanged, in the first rate-setting session under Mark Carney's governorship, as incoming economic data signaled recovery gaining traction.

On conclusion of the meeting on Thursday, the Monetary Policy Committee maintained the size of stimulus unchanged at GBP 375 billion and also the record low 0.50 percent interest rate. The decision came in line with expectations.

In an unusual step of issuing a statement with a no-change decision, the bank said the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Further, the bank signaled the introduction of guidance on future interest rate path, most likely in August.

Vicky Redwood, chief UK economist at Capital Economics, said the best guess is that the guidance will consist of a commitment to keep interest rates at 0.5 percent until unemployment has fallen below a certain threshold, although thresholds for nominal GDP or wage growth are also possible.

Signaling more actions, the central bank warned that significant upward movement in market interest rates would weigh on growth and inflation outlook. Markets expect the former Bank of Canada Chief Carney to call for more accommodative measures to achieve "escape velocity" in Britain's recovery.

There have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time, the bank said.

Though the inflation is likely to rise further in the near term, the bank expects it to fall back towards the 2 percent target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

The recent survey results underscored the strength of U.K. recovery. According to the latest Purchasing Managers' survey, the dominant service sector and manufacturing logged its strongest growth in more than two years in June.

At the same time, the construction sector expanded for the second straight month in June helped by strong residential building activity.

Carney replaced Mervyn King on July 1. King had seen his demand for additional QE being outvoted continuously by a majority of six members in the final months of his tenure.

Only the minutes of the meeting to be published on July 17 will give an idea about how members voted at this month's meeting.

While it is looking increasingly unlikely that the Bank of England will loosen monetary policy further, IHS Global Insight's Chief U.K. economist Howard Archer suspects that Carney will be keen to make it absolutely clear that any tightening of monetary policy is a very long way off.

by RTTNews Staff Writer

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