Bank to Keep Foot on Monetary Pedal
Filed at 6:05 a.m. ET
LONDON (Reuters) - Optimism about economic recovery is growing but the central bank is unlikely to take its foot off the monetary policy pedal just yet.
Analysts expect the Bank of England to keep interest rates at a record low of 0.5 percent not just on Thursday but well into next year. It is also likely to make no change to the pace at which it is pumping money into the economy by buying assets.
A minority of strategists, however, reckon the Bank will take further action to boost the economy, either by raising its asset buying target above 175 billion pounds or lowering the rate it pays on commercial banks' reserves -- an attempt to encourage banks to lend rather than park cash with the central bank.
"The bigger question for the market will be what happens to the current monetary framework and the topic of reserve remuneration," said Jason Simpson, strategist at RBS.
With markets pricing in a cut in the reserve remuneration rate as an outside risk since Governor Mervyn King said last month the Bank would look at the issue, strategists said a no-change decision could be mildly positive for sterling and weigh on short-dated gilts.
While many other central banks are talking increasingly about exit strategies, the central bank has stood out with its more dovish stance.
Its decision to increase its asset purchase programme to 175 billion pounds last month surprised many, and minutes of their meeting showed three of the nine policymakers, including Governor Mervyn King, had wanted an even bigger increase.
BRIGHTER OUTLOOK
The Bank's current asset purchase programme is not due to end until the start of November and the need for further stimulus measures has been reduced by a drip-feed of increasingly encouraging data.
Consumer confidence has picked up, employers have starting hiring again and the FTSE 100 index has extended its break above the pyschologically-important 5,000 level.
Even the housing market is showing signs of life. Data from the Halifax on Thursday showed house prices rose 0.8 percent in August after an upwardly revised 1.2 percent gain in July.
Figures from the Nationwide Building Society show an even more convincing recovery, with house prices up for a fourth month running in August and at their fastest monthly rate in more than two years.
And two of the UK's biggest retailers, Home Retail Group and Kesa Electricals, posted better-than-expected trading updates, providing further evidence a consumer recovery is underway.
"Having raised the QE total by 50 billion pounds last month most Monetary Policy Committee members will probably prefer to wait and see if evidence is mounting that the policy is working," said Howard Archer, economist at Global Insight.
The upbeat tone of recent data has prompted organisations like the International Monetary Fund to revise up the growth outlook.
But the government's ballooning budget deficit will require hefty tax rises or spending cuts in the coming years and banks remain reluctant to advance credit.
"There are good reasons to think that the UK recovery will lag behind that in the United States and probably that in the euro zone over the next year or so," said Capital Economics chief economist Jonathan Loynes.
"We still expect monetary policy conditions to remain loose for a prolonged period, with official interest rates perhaps staying at their current level until 2011 or beyond."
(Editing by Mike Peacock)
Filed at 6:05 a.m. ET
LONDON (Reuters) - Optimism about economic recovery is growing but the central bank is unlikely to take its foot off the monetary policy pedal just yet.
Analysts expect the Bank of England to keep interest rates at a record low of 0.5 percent not just on Thursday but well into next year. It is also likely to make no change to the pace at which it is pumping money into the economy by buying assets.
A minority of strategists, however, reckon the Bank will take further action to boost the economy, either by raising its asset buying target above 175 billion pounds or lowering the rate it pays on commercial banks' reserves -- an attempt to encourage banks to lend rather than park cash with the central bank.
"The bigger question for the market will be what happens to the current monetary framework and the topic of reserve remuneration," said Jason Simpson, strategist at RBS.
With markets pricing in a cut in the reserve remuneration rate as an outside risk since Governor Mervyn King said last month the Bank would look at the issue, strategists said a no-change decision could be mildly positive for sterling and weigh on short-dated gilts.
While many other central banks are talking increasingly about exit strategies, the central bank has stood out with its more dovish stance.
Its decision to increase its asset purchase programme to 175 billion pounds last month surprised many, and minutes of their meeting showed three of the nine policymakers, including Governor Mervyn King, had wanted an even bigger increase.
BRIGHTER OUTLOOK
The Bank's current asset purchase programme is not due to end until the start of November and the need for further stimulus measures has been reduced by a drip-feed of increasingly encouraging data.
Consumer confidence has picked up, employers have starting hiring again and the FTSE 100 index has extended its break above the pyschologically-important 5,000 level.
Even the housing market is showing signs of life. Data from the Halifax on Thursday showed house prices rose 0.8 percent in August after an upwardly revised 1.2 percent gain in July.
Figures from the Nationwide Building Society show an even more convincing recovery, with house prices up for a fourth month running in August and at their fastest monthly rate in more than two years.
And two of the UK's biggest retailers, Home Retail Group and Kesa Electricals, posted better-than-expected trading updates, providing further evidence a consumer recovery is underway.
"Having raised the QE total by 50 billion pounds last month most Monetary Policy Committee members will probably prefer to wait and see if evidence is mounting that the policy is working," said Howard Archer, economist at Global Insight.
The upbeat tone of recent data has prompted organisations like the International Monetary Fund to revise up the growth outlook.
But the government's ballooning budget deficit will require hefty tax rises or spending cuts in the coming years and banks remain reluctant to advance credit.
"There are good reasons to think that the UK recovery will lag behind that in the United States and probably that in the euro zone over the next year or so," said Capital Economics chief economist Jonathan Loynes.
"We still expect monetary policy conditions to remain loose for a prolonged period, with official interest rates perhaps staying at their current level until 2011 or beyond."
(Editing by Mike Peacock)
Source: New York Times
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