The Bank of England fulfilled City expectations today by keeping its monetary stimulus programme on hold, despite a tightening of money market rates in recent months.
New Governor Mark Carney said last week that the Bank would consider injecting more stimulus into the economy if financial conditions tightened and posed a threat to the recovery. But the monetary policy committee today refrained from adding to its £375 billion gilt purchase programme.
The MPC also kept interest rates at their historic lows of 0.5 per cent. The Bank has said it will keep the base rate at this level until unemployment falls to at least 7% of the workforce, something it does not anticipate occurring until the second half of 2016. But traders are pricing in a rate rise earlier than this, with many believing a hike will come by the middle of 2015.
Ten-year gilt yields have also been steadily rising since Carney unveiled his policy of “forward guidance” on rates last month, although the Bank is more concerned with shorter-term money market rates. The pound has also been strengthening, with the trade-weighted sterling rate rising to 82 this month, its highest since January.
City analysts say the unemployment rate is likely to fall to 7% sooner than the bank thinks. However, Carney also warned last week that the 7% rate was merely a “staging post” and that hitting it would not necessarily result in a rise in rates. The unemployment rate presently stands at 7.8%.
