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12 Feb 2014
BoE modifies forward guidance
FXStreet (Łódź) - According to the BoE's quarterly Inflation Report published on Wednesday, the central bank expects to keep rates at the record low level of 0.5% for at least one more year, even if the unemployment rate falls to the MPC's 7% threshold, which is expected already in the first quarter of 2014.
The BoE indicated that the UK economy has “scope to absorb spare capacity further before raising bank rate.” But once the MPC starts raising them, it will do it only gradually and not to such a high level as that seen before the crisis.
“The legacy of the financial crisis and the persistence of economic headwinds mean that interest rates may need to remain at lower levels for some time to come,” the BoE stated. “Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of bank rate is likely to be materially below the 5 percent level set on average by the committee prior to the financial crisis.”
The MPC projected that UK GDP in the last quarter of 2013 grew by 0.9%, in comparison with the previous estimate of +0.7%. For the entire 2014 the central banks sees a 3.4% expansion, up from the November forecast of 2.8%.
Inflation is expected to slow to 1.7% in the second quarter of 2015. Later on it should start increasing again and hit 1.9% in 2016.
Carney defends forward guidance, presents adjustments
Governor Mark Carney, speaking at a press conference following the release, suggested that the UK economic recovery had been progressing well, but that it is still “neither balanced nor sustainable.” He defended the central bank's forward guidance, saying that it helped to cool down rate hike expectations.
The BoE chief also commented on the unexpectedly quick fall of the jobless rate to the 7% threshold, attributing it to the drop in the total number of the long-term unemployed. He pointed out however that the number of part-time workers was rising towards the all time high.
Therefore, under the new forward guidance, the BoE will look at various indicators such as the labor force participation rate, hours worked, productivity and wages. It will also maintain the pace of asset purchases at £375 billion, at least uuntil the first rate hike.
James Knightley from ING comments: “For now we continue to forecast the first rate hike coming in February next year, but if we are correct on the employment/wage dynamic we see the threat of an earlier move. Nonetheless, we agree that policy tightening will be slow and steady and agree that Bank Rate will be “materially below the 5% level set on average” by the MPC prior to the financial crisis. We suspect that Bank Rate will settle more likely at the 3.5-4% level in the medium to longer term.”
The BoE indicated that the UK economy has “scope to absorb spare capacity further before raising bank rate.” But once the MPC starts raising them, it will do it only gradually and not to such a high level as that seen before the crisis.
“The legacy of the financial crisis and the persistence of economic headwinds mean that interest rates may need to remain at lower levels for some time to come,” the BoE stated. “Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of bank rate is likely to be materially below the 5 percent level set on average by the committee prior to the financial crisis.”
The MPC projected that UK GDP in the last quarter of 2013 grew by 0.9%, in comparison with the previous estimate of +0.7%. For the entire 2014 the central banks sees a 3.4% expansion, up from the November forecast of 2.8%.
Inflation is expected to slow to 1.7% in the second quarter of 2015. Later on it should start increasing again and hit 1.9% in 2016.
Carney defends forward guidance, presents adjustments
Governor Mark Carney, speaking at a press conference following the release, suggested that the UK economic recovery had been progressing well, but that it is still “neither balanced nor sustainable.” He defended the central bank's forward guidance, saying that it helped to cool down rate hike expectations.
The BoE chief also commented on the unexpectedly quick fall of the jobless rate to the 7% threshold, attributing it to the drop in the total number of the long-term unemployed. He pointed out however that the number of part-time workers was rising towards the all time high.
Therefore, under the new forward guidance, the BoE will look at various indicators such as the labor force participation rate, hours worked, productivity and wages. It will also maintain the pace of asset purchases at £375 billion, at least uuntil the first rate hike.
James Knightley from ING comments: “For now we continue to forecast the first rate hike coming in February next year, but if we are correct on the employment/wage dynamic we see the threat of an earlier move. Nonetheless, we agree that policy tightening will be slow and steady and agree that Bank Rate will be “materially below the 5% level set on average” by the MPC prior to the financial crisis. We suspect that Bank Rate will settle more likely at the 3.5-4% level in the medium to longer term.”