UK: MPC leaves monetary policy on hold as Sir Mervyn King bows out
- Credit: Archant
Outgoing Bank of England governor Sir Mervyn King called time on 16 years of rate-setting today as policymakers held fire on further measures to boost the money supply amid growing economic optimism.
In the last rates decision chaired by Sir Mervyn before he hands over the reins at the end of the month, the bank kept its quantitative easing (QE) programme to boost the economy steady at £375billion and held interest rates at 0.5%
Upbeat surveys from construction, manufacturing and services sectors this week gave the UK’s growth prospects a boost, allowing Sir Mervyn to hand over to incoming governor Mark Carney with the recovery on track.
The bank’s Monetary Policy Committee (MPC) was widely expected to pause on more economic stimulus this month after the UK economy grew by 0.3% in the first quarter, avoiding a much-feared triple-dip recession.
Economists said the UK is now “firing on all cylinders” after the trio of economic surveys this week, covering manufacturing, services and construction, showed growth picked up markedly in May.
Government housebuilding stimulus schemes have been credited with lifting the construction sector out of the doldrums, with higher sales of new homes and house prices prompting firms to hire more staff.
Industry figures today showed the Government’s Help to Buy housing scheme has got off to a “flying start”, with 4,000 homes reserved for purchase in just two months.
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House prices also recorded their strongest annual increase for more than two years in May, mortgage lender Halifax reported today.
Companies in Britain’s vast services sector - which spans shops to buses - also took on more staff and reported rising workloads, delivering the sharpest rise in activity for more than a year.
And factories, which have held back growth for much of the downturn, recorded their best performance for 14 months in May and added more workers to cope with higher output and orders.
Economists said the data put the UK on track to hit the Bank’s forecast of 0.5% growth in the second quarter.
Minutes published later this month will reveal whether Sir Mervyn stuck with his call for more QE at his 194th and final rates meeting after voting for another £25bn of asset purchases at recent meetings.
He and fellow members David Miles and Paul Fisher have so far failed to garner support for increasing QE to £400bn.
Since March 2009, the bank has pumped £375bn into the economy, largely by buying Government debt, to drive up other asset prices and stimulate sluggish growth. It has also held rates at their record low since then.
Sir Mervyn has presided over every rate-setting meeting since June 1997 when the Bank was first given responsibility for monetary policy. He hands over on July 1 to Canadian Mark Carney, who joins from the Bank of Canada.
CBI director of economics Stephen Gifford said the economy is showing signs of a “budding recovery” which will gain traction as another Bank stimulus scheme, Funding for Lending (FLS), begins to feed through.
FLS offers banks and building societies discounted loans in return for boosting credit to households and businesses, but has so far had limited impact on small companies.
Some even speculated the bank’s QE drive might have run its course.
Markit chief economist Chris Williamson said: “Mark Carney inherits an economy that is showing signs of gathering momentum.
“It is likely that growth forecasts will generally start to be revised up for the year, having fallen to an average of 0.6%.
“Barring any upsets, growth should continue to revive, meaning additional stimulus will be off the table for some time, and quantitative easing may have even come to an end.”
But David Tinsley, UK economist at BNP Paribas, said weaker inflation and sluggish global growth are likely to mean a “significant extension” of QE once Mr Carney arrives.
“Most likely this will take the form of up to £100bn of extra purchases over the year from August,” he said.
Investec economist Philip Shaw added: “The economy has suffered false starts before.
“It would take a stratospheric set of economic data or signs of a sharp rise in medium-term inflation pressures to prevent the MPC from easing policy again over the coming months.”
David Kern, chief economist at the British Chambers of Commerce, called for Mr Carney to “make better use” of QE.
He said: “If the MPC agrees to purchase private sector assets other than gilts, such as securitised small and medium-sized business loans, it could make banks less risk-averse in lending to businesses.”
Currency and stock markets were largely unaffected by the widely expected rates and QE decisions.