Thursday, July 04, 2013
Bank holds - and guides
Posted by David Smith at 12:15 PM
Category: Thoughts and responses

The new era at the Bank of England has begun without a change in Bank rate or in the amount of quantitative easing - £375 billion - but a change of tone reflects the arrival of the new governor, Mark Carney.

The Bank is concerned about the rise in market interest rates, which it says is not warranted by anything it has in mind on rates, so it issued a statement which may be seen as its first stab at forward guidance.

This is the statement:

"Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, 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. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August."