BoE policy to stay unchanged as economy brightens

LONDON Thu Oct 10, 2013 12:06am BST

The Bank of England is seen in the City of London August 7, 2013. REUTERS/Toby Melville

The Bank of England is seen in the City of London August 7, 2013.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - The Bank of England is expected to leave monetary policy unchanged on Thursday despite more signs of economic strength, as it sticks to its commitment to keep interest rates on hold while joblessness stays above target.

Most data over the past month has suggested that Britain's stalled recovery is finally getting back in gear, and on Tuesday the International Monetary Fund revised up its economic growth forecast to 1.4 percent this year and 1.9 percent for 2014.

Nonetheless, output remains well below pre-crisis levels, in contrast to other major economies, and the central bank believes the economy has plenty of scope to grow further without generating domestic inflation pressures.

Industrial output fell unexpectedly in August as factories cut production, data showed on Wednesday.

This helps explain why the Monetary Policy Committee pledged in August not to raise interest rates before the unemployment rate falls to 7 percent - something it forecasts will take three years - unless inflation threatens to get out of control.

"They should probably be firmly sat on hold this month, next month and for several months to come," said Alan Clarke, UK economist at Scotiabank.

Clarke, like most other private-sector economists, expects unemployment to fall more quickly than the Bank forecasts, and financial markets think a first rise in interest rates from their record-low 0.5 percent could come as soon as early 2015.

Unemployment currently stands at 7.7 percent, while consumer price inflation of 2.7 percent has exceeded the BoE's 2 percent target since December 2009 and is not forecast to be back on target until late 2015.

More economic stimulus in the form of asset prices now looks unlikely, as the two policymakers who backed it earlier this year, Paul Fisher and David Miles, have said they would prefer to keep it in reserve until the economy weakens.

The main immediate threat on the horizon is the risk that the United States government shutdown escalates into a default on U.S. government debt, something which Fisher said could be extremely serious for markets and the economy.

(Additional reporting by Joshua Franklin; Editing by Hugh Lawson)

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