BoE keeps rates unchanged as economy picks up

Written by Reuters | London | Updated: Jan 11 2014, 01:22am hrs
The Bank of England left monetary policy unchanged on Thursday, sticking to its plan to keep interest rates at a record low until the countrys surprisingly fast economic recovery broadens out. Britain has moved from a laggard to a leader in terms of growth among the worlds biggest economies last year.

Its economy is expanding by more than 3% in annualised terms although there are concerns the recovery could prove unsustainable, especially as wage growth remains weak.

The BoE said in August it will not think about raising rates until unemployment falls to 7%. Since then unemployment has come down much faster than the Bank expected, raising questions about how long it can hold off on raising rates. But inflation has also fallen to within a whisker of its 2% target, reducing the pressure on the BoE.

At its two-day meeting which ended on Thursday, the Banks Monetary Policy Committee kept interest rates at 0.5%, as expected by all the economists who took part in a Reuters poll.

It also left its bond-buying programme unchanged at 375 billion ($618 billion).

The MPC issued no statement after its announcement.

The pace of Britains recovery has helped the pound to strengthen by 5% against the euro and 10% against the dollar since the middle of last year.

Governor Mark Carney has sought to dampen speculation about an early rate rise, stressing how Britains economy remains 2% smaller than before the financial crisis, unlike many other industrialised nations which are now bigger than in 2008. Carney and other policymakers have said repeatedly that the 7% threshold is not an automatic trigger for a rate hike.

But with unemployment falling to 7.4% at its most recent reading and expected to drop further in coming months, some economists say the BoE will have to tweak its guidance on when it will start to consider raising interest rates.

Carney has stressed that the BoE has a range of tools it can use to tackle any problems in Britains fast-recovering housing market, such as curbs on mortgage lending, without resorting to the blunt instrument of raising interest rates.

Data published earlier on Thursday showed the trade deficit, another weak point of Britains recovery, barely narrowed in November although exports to its main trading partners in the euro zone picked up.