Bank of England holds fire after forward guidance overhaul

LONDON Thu Mar 6, 2014 3:07pm GMT

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 kept interest rates unchanged on Thursday, seeking to give the economy more time to build before removing its stimulus.

The BoE left its Bank rate at 0.5 percent, where it has stood since March 2009, during the depths of the financial crisis from which Britain's economy has not yet fully recovered.

The Monetary Policy Committee also said it would reinvest 8.1 billion pounds of proceeds from government bonds the Bank bought through its quantitative easing programme and which are due to mature in March.

Britain's surprisingly strong turnaround, which started last year, forced the central bank to come up with a new version of its forward guidance policy. It is designed to signal no quick tightening of monetary conditions, despite the recovery in the economy.

Last year, the Bank said it would only consider interest rate hikes when unemployment fell to 7 percent.

But as unemployment quickly approached that level, the BoE last month broadened the focus of the guidance towards a wider assessment of spare capacity, or slack in the economy.

It also indicated that the first rate hike could come in the second quarter of 2015.

Since then, BoE officials have suggested a rate rise could come sooner if inflation pressures are bigger than expected or wages rise faster than expected.

Britain's economy appears to have started this year on the same strong footing as in late 2013.

The manufacturing and services industries enjoyed solid growth in February, according to surveys this week. Data on Thursday showed one measure of house prices rising at the fastest monthly pace since May 2009.

Despite the recovery, the UK economy remains 1.4 percent smaller than its peak in the first quarter of 2008. With inflation now below the Bank's 2 percent target, there is little pressure on the BoE to raise interest rates in a hurry.

The European Central Bank also meets on Thursday. It is expected to hold off cutting interest rates, opting instead to loosen lending conditions to fight off the danger of debilitating low inflation.

(Editing by Jeremy Gaunt)

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