Policy kept unchanged by BoE and ECB for the time b
LONDON The Bank of England Thursday decided to leave its monetary policy unchanged and continue with its programme of government bond purchasing, signaling that its current plan would suffice to tackle continuing economic weakness.
In a statement, the BoE said that its Monetary Policy Committee had Thursday “voted to maintain the official bank rate paid on commercial bank reserves at 0.5%.”
The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009.
Weighing both the consumer morale and the government’s compulsions including popularity, the Committee also voted to continue with its programme of asset purchases totaling 375 billion pounds, financed by the issuance of central bank reserves.
The Committee, which expects the announced programme of asset purchases to take another three months to complete, assured that the scale of the programme will be kept under review.
British economic output shrank by 0.7 per cent in the second quarter, a much bigger fall than what economists had expected.
Britain’s economy, which slid into its second recession in four years at the end of 2011, is currently under pressure to go slow on its multi-year austerity programme to close the country’s vast budget deficit and instead to provide stimulus for growth and prop up consumer sentiments.
As yet there is little sign that the government will shift focus from its austerity programme. It is however going ahead with its ongoing programme of asset purchases financed by the issuance of central bank reserves, initiated on 5 March 2009.
The previous change in the size of that programme was an increase of 50 billion pounds to a total of 375 billion pounds on 5 July 2012.
The Bank has decided to continue to offer purchase of high-quality private sector assets on behalf of the Treasury, financed by the issue of Treasury bills, in line with the arrangements announced on 29 January 2009 and 29 November 2011.
The BoE last month also restarted its asset purchase programme to help corporate restructure their loans and lower capital costs. On Wednesday it also launched a joint scheme with the finance ministry to reduce the cost of bank loans for home-buyers and businesses.
But as the flow of dismal data on consumer and business sentiments and unemployment continues, it is expected that the central bank may be forced to rethink its strategy to boost growth.
European Central Bank (ECB) President Mario Draghi also disappointed the market Thursday by indicating that no immediate action is proposed on its new programme to buy euro zone debt.
The ECB also kept its main interest rate on hold at 0.75%, capping a week of inactivity from policymakers after the US Federal Reserve and the Bank of England opted to wait it out.
The Bank’s monetary policy committee (MPC) is hoping that existing measures such as last month’s additional 50 billion pounds of quantitative easing and this week’s launch of a “Funding for Lending” scheme will revive the economy.
The MPC, which has concluded its latest meeting under the chairmanship of Bank governor Sir Mervyn King, has also considered cutting rates below the current level of 0.5% in a move that once seemed improbable.
Hopes that the ECB would introduce new measures were stoked a week ago when Draghi told an audience in London that he would do whatever it takes to save the euro.
Many had interpreted it to mean that the bank at the very least may resume its bond-buying programme to keep a lid on Spain and Italy’s borrowing costs.
There is also expectation that the BoE might even lower interest rates againsomething it has steadfastly resisted since its last rate cut in March 2009.
At July’s meeting, MPC members said they may reconsider a rate cut in a few months time, once they have assessed the impact of the new Funding for Lending Scheme that offers cheap financing to banks which lend to businesses and home-buyers.
A clearer insight into the central bank’s outlook will come on August 8, when BoE Governor Mervyn King presents the central bank’s quarterly forecast update.
“King will stressas he has for the past yearthe damage from the euro zone crisis and the impact of that on the growth and inflation forecasts,” said Brian Hilliard, an economist at Societe Generale.
CMC Markets analyst Colin Cieszynski said: “Today’s announcement appears likely to destroy any remaining hopes that the crisis can be resolved in the near term.”