UK: Bank of England unlikely to move on monetary policy just yet

The Bank of England

The Bank of England - Credit: PA

The Bank of England is expected to keep the City waiting on fresh measures to stimulate the economy when it holds its latest interest rate meeting today.

Rates should be kept on hold at 0.5% while a much-anticipated announcement on whether the bank will adopt a policy of “forward guidance” on their future path will not be made until next week.

However the impact of new governor Mark Carney remains an unknown quantity after policymakers issued a surprise statement alongside their no-change decision last month, their first meeting under his tenure.

Mr Carney, seen as a monetary policy activist, was widely expected before he took charge in July to favour an increase in quantitative easing (QE), the policy of pumping money into the economy which currently stands at £375 billion.

But he along with the rest of the bank’s nine-member Monetary Policy Committee (MPC) unanimously rejected such a move last month.

Figures last week showing that gross domestic product (GDP) growth had doubled to 0.6% appeared to weaken the case for any more stimulus this time, though members of the MPC appear to take a less optimistic tack than some observers.

Despite the signs of improvement, GDP remains 3.3% below pre-recession levels. Mr Carney is believed to favour an approach of central bank intervention to drive growth to “escape velocity” away from the downturn.

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The bank’s statement last month said the recovery remained “weak by historical standards” and indicated that interest rates would not be rising from their current level for some time to come, which caught the City unawares and sent share prices soaring.

The statement was seen as a first tentative step towards forward guidance, a policy tool by which central bankers seek to reassure markets over the future path of rates

A formal decision on whether to adopt such a policy is due to be announced by the bank on August 7.

Today’s meeting is likely to be closely watched for any more clues about the Bank’s approach though the main substance of the MPC’s decision is thought unlikely to contain any fireworks.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The August meeting is unlikely to see any change in monetary policy ahead of a highly probable decision to move to forward guidance on monetary policy a week later.”

However, Investec economist Victoria Clarke said that Mr Carney might not have any better opportunity to give “one final push” to QE, predicting a £50billion addition to the stimulus.