February 7, 2013
BOE holds rate, QE target, but ready to provide stimulus
The Bank of England (BOE) maintained its Bank Rate at 0.5 percent and the 375 billion pound target for asset purchases, as expected, but added that it was ready to provide additional stimulus and did not want to derail the slow economic recovery by tightening policy to bring inflation back to target.
The BOE, which has held its rate steady since March 2009, said the pace of economic expansion was likely to remain muted in the near term while inflation has “remained stubbornly above the 2% percent target”and is likely to rise further and may remain above the target for the next two years, partly reflecting a persistent impact of administered and regulated prices, and the decline in pound sterling.
But the bank still expects the United Kingdom’s economy to slowly recover, helped by a further easing in credit conditions from its Funding for Lending Scheme (FLS) and an improvement in the global economic environment.
“But the risks are weighted to the downside, not least because of the challenges facing the euro area,”the BOE said in a statement after a meeting of its Monetary Policy Council.
The UK’s headline inflation rate has remained sticky at 2.7 percent in December, November and October, which economists say has limited the bank’s ability to increase its target for asset purchases, known as quantitative easing.
But inflation is expected to ease back to the bank’s target over time as growth in productivity dampens higher domestic costs and external price pressures fade, the BOE said.
The BOE’s policy council said it was willing to look through the “temporary, albeit protracted, period of above-target inflation” and “attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.”
Although the BOE’s remit is to deliver price stability, this should still be achieved without too much volatility in output and it judged that its current policy stance was fully consistent with that remit.
“The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation,” the BOE said.
The BOE has been purchasing assets, including UK Treasury bonds, since March 2009 and has increased the size of the program several times, most recently in July 2012. In March 6.6 billion pounds of UK bonds, known as gilts, will mature and the bank said it would reinvest those funds.
The UK’s Gross Domestic Product contracted by 0.3 percent in the fourth quarter of 2012 from the third quarter for a year-on-year stagnation in the UK economy, unchanged from the third quarter.
“The weakness in overall output sits in sharp contrast to the continued strong employment growth, suggesting that the financial crises may have had some impact on the effective supply capacity of the economy,” the BOE said.