UK: Bank of England leaves monetary policy on hold again
- Credit: PA
The Bank of England kept interest rates on hold today and left its £375billion money supply-boosting drive unchanged as hopes grow over a strong pick-up in UK growth.
Policymakers, who concluded their monthly meeting a day early yesterday to allow some officials to attend the G20 meeting in Washington, have already pledged to keep rates at their record low of 0.5% until the unemployment rate falls to 7%.
The bank’s Monetary Policy Committee (MPC) also held off from more quantitative easing (QE) which has now been held at the same level since July last year as the economic recovery has begun to gain traction.
Recent figures have pointed to a surge in third-quarter growth, with some experts pencilling in a rise of as much as 1% in what would mark a sharp improvement on the 0.7% growth seen in the previous three months.
But expectations have been reined in this week after disappointing official data for the manufacturing sector and worse-than-expected trade figures - described by one analyst as a “reality check” for the UK economy.
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Think-tank the National Institute of Economic and Social Research (NIESR) released its latest forecast yesterday, giving a more muted prediction for 0.8% growth in the third quarter.
According to the Office for National Statistics (ONS), output from British factories fell unexpectedly in August, sending overall industrial production down 1.1% in its biggest monthly fall for nearly a year.
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The ONS added that the UK’s trade deficit remained stubbornly high at £3.3 billion in August, down only marginally on the £3.4 billion recorded in July.
The figures came as a setback after last week’s economic cheer, when the closely watched Markit/CIPS purchasing managers’ index (PMI) showed the dominant services sector grew at its fastest pace for 16 years in the third quarter.
House price data from Halifax also showed a 6.2% year-on-year increase in September in the biggest hike since 2010 as the Government’s Help to Buy initiative continues to send would-be buyers flocking into the market.
Economists said the disappointing manufacturing figures confirm that the recovery remains volatile, but believe it remains on the right track and should continue to gather pace.
The strength of the recovery in recent months has increased pressure on the Bank’s rates pledge, although America’s ongoing partial government shutdown and its decision to delay QE tapering has slightly pushed back the market’s expectation for the first UK rate hike.
Despite this, the City is still expecting the Bank to raise historically low interest rates by early 2015 and remains unconvinced over the Bank’s prediction that unemployment will not fall to the 7% threshold until mid to late 2016.
Martin Beck, UK economist at consultancy Capital Economics, said Bank governor Mark Carney’s forward guidance policy was beginning to have success despite a “shaky start”.
As well as market rate expectations being pushed back slightly, the pledge now looks less at risk of being broken by one of the various “knock-outs” set by the Bank, such as high inflation.
Consumer Prices Index inflation fell again in August to 2.7% and is expected to have eased back further in September, according to Mr Beck.
While today’s MPC decision was widely expected, Investec economist Philip Shaw said November’s meeting will be more significant, as it will coincide with the next set of quarterly forecasts from the Bank.
He said: “A vital point is whether the MPC makes any upward revisions to the growth outlook, resulting in the committee bringing forward the point at which it expects unemployment to fall to 7%, or less likely, whether it alters its forward guidance.”