The Bank of England will probably leave stimulus unchanged today as the economic recovery gathers momentum, reinforcing policy makers’ argument that no more aid is needed.
The Monetary Policy Committee led by Governor Mark Carney will keep the key interest rate at a record-low 0.5 percent and bond-buying program on hold, according to two Bloomberg News surveys of economists. The BOE introduced forward guidance in August, saying it will keep borrowing costs on hold until late 2016. It will announce its decisions at noon in London.
The panel was unanimous on the policy stance last month and its position may be further cemented by recent surveys pointing to accelerating growth in the third quarter. Carney is joining global counterparts at International Monetary Fund meetings this week in Washington, where a political deadlock in budget talks highlights the potential risks to a sustained pickup.
“The economic recovery seems to be continuing at a healthy pace, and there’s less of a need than a few months ago to announce more stimulus,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “There certainly is a risk stemming from U.S. budget talks to the U.K. economy. But for now we’re likely to see a united front.”
The MPC met Oct. 8 and 9, a day earlier than normal, to allow Carney to travel to Washington. The decision follows the European Central Bank’s announcement last week that it would leave its main refinancing rate at a record low of 0.5 percent.
Under its guidance policy, the MPC said it won’t consider raising its key rate at least until unemployment falls to 7 percent from 7.7 percent, which it forecasts may not happen until late 2016. The policy has three caveats linked to inflation expectations and financial stability that if triggered would void the pledge.
Carney said in an interview last month that he doesn’t see an argument for expanding quantitative easing again, and minutes of the MPC’s September meeting showed all nine members agreed that the current policy setting was appropriate.
Policy maker Paul Fisher said on Oct. 2 that guidance is supporting the real economy, and market expectations that the BOE will increase rates sooner than projected don’t suggest it has failed. His colleague David Miles said the recent strengthening of the economy doesn’t signal an early tightening.
“It would be spectacularly misguided to think that some signs of more normal growth mean that the economy is back to normal,” Miles said Sept. 24. Both officials had been voting for more stimulus until July, when Carney joined the BOE.
“Policy is on autopilot,” said David Tinsley, an economist at BNP Paribas SA in London and a former central bank official. “Inflation could conceivably be a concern in a year’s time or so if consumption growth continues to strengthen, but right now that’s not a worry either.”
The International Monetary Fund raised its forecast for U.K. growth this week, and now sees expansion of 1.4 percent in 2013 and 1.9 percent next year. The National Institute for Economic and Social Research estimates third-quarter growth of 0.8 percent, up from 0.7 percent in the April-June period.
Tesco Plc (TSCO), the biggest U.K. grocer, reported on Oct. 2 that same-store domestic sales were unchanged in the second quarter, marking an improvement from the 1 percent decline in the first quarter.
As the economy has strengthened, so too has the property market, helped in part by government measures. Prime Minister David Cameron, who faces a general election in less than two years, bought forward to this month a program to help boost mortgage lending. The Help to Buy scheme provides government guarantees allowing house purchases with smaller deposits, raising criticism that the plan will stoke a bubble.
While most reports have pointed to a strengthening recovery, there are signs it remains uneven. Data yesterday showed industrial output unexpectedly dropped 1.1 percent in August and factory production fell 1.2 percent.
The MPC are also having to consider the potential threat from the U.S. budget impasse. The government shutdown resulting from the fiscal standoff between President Barack Obama and the Republicans has lingered into a second week and the Treasury Department has set an Oct. 17 deadline for Congress to raise the country’s $16.7 trillion debt ceiling.
While market rates rose after the BOE introduced guidance, that trend has since reversed. Ten-year borrowing costs have fallen to 2.68 percent from above 3 percent last month. Short-sterling futures contracts maturing in December 2014 have fallen 17 basis points to 0.84 percent since Sept. 10.
Barring a U.S. government default or other unforeseen event, the improving tone to recent U.K. data support the case for Fisher and Miles to stick to their new positions and favor no more stimulus. According to Philip Rush, an economist at Nomura International Plc, the BOE may revise its labor-market outlook when it releases new projections next month.
“In speeches the doves have said quite clearly that they’re not that concerned on market pricing,” Rush said. “The MPC will be pulling forward its forecasts for when unemployment gets to 7 percent.
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