Bank of England keeps policy unchanged as economy brightens

LONDON Thu Oct 10, 2013 7:25pm 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 made no change to its monetary policy on Thursday, sticking to its pledge to keep interest rates at a record low for the foreseeable future despite signs of a strengthening economic recovery.

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 the country's growth prospects by the biggest margin for any advanced economy, seeing growth of 1.4 percent this year and 1.9 percent in 2014.

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

This helps explain why BoE Governor Mark Carney pledged in August not to raise interest rates before the unemployment rate fell to 7 percent - something the bank forecasts will take three years - unless inflation threatened to get out of control.

"UK monetary policy settings for now are on auto-pilot ... so forward guidance is delivering the sort of boring certainty the new governor was after," said David Tinsley, economist at BNP Paribas.

There was no marked move in the price of sterling or British government bonds following the BoE's announcement that it was keeping interest rates at 0.5 percent and leaving its total asset purchases unchanged at 375 billion pounds.

In addition, the bank as usual made no statement alongside its monetary policy announcement, and details of its discussions will not be published until the release of minutes on October 23.

While most private-sector economists think unemployment will fall rather more quickly from its current level of 7.7 percent than the BoE expects, Tinsley said interest rates were unlikely to rise any time soon.

"Even on an optimistic basis the UK labour market is not going to deliver an unemployment rate at 7 percent for six to twelve months at the very earliest, while inflationary pressures are under control," he said.

Consumer price inflation currently stands at 2.7 percent, and has exceeded the BoE's 2 percent target since late 2009.

There are also some clouds on the horizon for Britain's recovery.

An unexpected fall in August's industrial output has raised questions about whether the economy is expanding as rapidly as private-sector surveys have suggested, while there is also a risk that the U.S. government shutdown escalates into a default on government debt.

But more economic stimulus in Britain in the form of asset purchases looks unlikely for now, 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 in case the economy weakens.

(Editing by Toby Chopra)

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