The Bank of England signaled a growing concern about rising bond yields and volatile markets as it kept its stimulus program on hold at Mark Carney’s inaugural decision as governor.
The nine-member Monetary Policy Committee held quantitative easing at 375 billion pounds ($567 billion), as forecast by all 44 economists in a Bloomberg News survey. Carney replaced Mervyn King on July 1, becoming the first foreigner to run the 319- year-old central bank.
“Market interest rates have risen sharply internationally and asset prices have been volatile,” the central bank said in a statement accompanying the decision. While the economic outlook is “broadly similar” to forecasts published in May, “significant upward movement in market interest rates would, however, weigh on that outlook.”
Reports this week on manufacturing, services and the housing market signaled that the U.K. economy is strengthening. Still, with the recovery not yet assured and bond yields rising, the MPC is reviewing new tools such as forward guidance as it looks at ways to cement the exit from the slump.
The BOE also held its benchmark interest rate at a record low 0.5 percent, as predicted by all 53 economists in a Bloomberg poll. It said that the “implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”
The pound dropped against the dollar after the decision and was at $1.5119 as of 12:11 p.m. London time, down 1.1 percent from yesterday. The 10-year U.K. government bond yield fell 3 basis points to 2.36 percent. The yield reached the highest since 2011 on June 24 after remarks by Federal Reserve Chairman Ben S. Bernanke that the central bank may begin to taper its monthly stimulus fueled a rout in government bonds.
The European Central Bank will hold its key interest rate at 0.5 percent today, according to 61 of 62 economists in a Bloomberg survey. The bank will announce the decision at 1:45 p.m. in Frankfurt and President Mario Draghi will hold a press conference 45 minutes later.
In the U.K., Markit Economics said this week that services and manufacturing growth accelerated to their fastest in more than two years in June, while construction expanded the most in more than a year. Markit said the data point to second-quarter economic growth of at least 0.5 percent. A release today from Halifax showed house prices rose to almost a three-year high last month.
King failed in his last five MPC meetings to persuade a majority on the MPC to back a push by him, Paul Fisher and David Miles to expand QE by 25 billion pounds.
Those backing maintaining stimulus last month argued the economy is improving, inflation is above the BOE’s 2 percent target and buying more gilts could prompt investors to take on too much risk, according to minutes released June 19.
While inflation accelerated to 2.7 percent in May, King said June 19 the outlook is for it to return to the goal.
“The greater risk at present is that, over the next few years, unemployment remains unnecessarily high,” he said. “It is too soon to say that the job of securing recovery is complete. There is a powerful case for more stimulus in the short run.”
Carney, previously governor of the Bank of Canada, has also indicated a preference for further action. He said central banks aren’t “maxed out” and that guidance on future policy can help them respond to economic shocks and financial imbalances. Chancellor of the Exchequer George Osborne persuaded Carney to join the BOE to help revive the U.K. economy, saying he had the “fresh perspective needed.”
Since Carney’s appointment, Osborne affirmed the BOE’s right to use unconventional tools to stoke growth, including forward guidance. He also asked it to assess how intermediate thresholds would work and to report back in August, when Carney will hold a press conference to present the BOE’s new economic projections.
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