Mark Carney has moved the Bank of England closer to adopting formal forward guidance for financial markets, after minutes from the latest meeting of its Monetary Policy Committee showed a unanimous vote against more quantitative easing.
All nine members of the committee, including the new Governor, Mr Carney, voted to keep the Bank’s £375bn asset-purchase programme on hold earlier this month. Paul Fisher and David Miles, two members who had previously voted in favour of injecting £25bn more stimulus into the economy through gilt purchases, fell into line with the consensus.
City analysts said the vote signalled that the MPC was now almost certain to endorse a form of forward guidance for markets on the future path of interest rates next month, a tactic known to be favoured by the new Governor.
“Mark Carney has united the committee around using forward guidance rather than more QE as a way to boost the economy,” said Vicky Redwood of Capital Economics.
The news lifted the pound by almost a cent and a half against the dollar to $1.524 as traders responded to the receding likelihood of more asset purchases.
The minutes repeated the MPC’s warning earlier this month that recent increases in market expectations of future interest rate hikes by the Bank had not been warranted by events in the real economy, despite some recent signs of recovery.
“It is full steam ahead for more formal forward guidance,” said Rob Wood of Berenberg Bank.
“It seems the policymakers can all agree on the need for interest rates to stay very low out until 2016.”
The MPC will unveil its considered verdict on the merits of forward guidance on 7 August, when the Bank unveils its quarterly Inflation Report.
There is still a question mark, however, over what “intermediate thresholds” the MPC will tie to the guidance, although some analysts expect it to be linked to a fall in the unemployment rate, as practised by the US Federal Reserve.
Official figures yesterday showed that the UK jobless rate remained stuck at 7.8 per cent in the three months to May, despite a 57,000 fall in the number of people classified as unemployed during the period.
This discrepancy was partially explained by an 87,000 jump in the number of economically inactive people. The number of people who have been unemployed for more than a year rose by 32,000 to 915,000, the highest levels since 1996.
However, there was better news on the number of people claiming jobseekers’ allowance, which fell by 21,200 in June on the previous month to 1.48 million. Wage growth picked up slightly, with total pay 1.7 per cent higher than a year earlier.
Despite the unanimous vote from the MPC to keep QE on pause this month, the minutes of the July meeting showed that some MPC members would be prepared to vote for more asset purchases in future if economic conditions deteriorated.
However, the minutes also reported the concerns of other policymakers that more QE could “complicate the transition to a more normal monetary policy stance at some point in the future”.
Austerity: UK rebuffs IMF
The Coalition was at loggerheads with the International Monetary Fund last night over the advice of the IMF’s staff that Chancellor George Osborne should put his austerity policies on pause in order to help support the recovery.
In its Article IV report, the IMF repeated its recommendation from May that the UK should offset its planned £10bn discretionary fiscal consolidation in 2013-14 by borrowing more to spend on infrastructure projects.
“At a time when households, firms, and banks are all deleveraging and external demand is weak, the tightening will pose further headwinds to growth,” said the IMF.
However, the Article IV report also related the response of the Treasury to this proposal. The UK authorities told representatives from the IMF that any deviation from the present path of deficit reduction would be “too risky”.
They added that borrowing more to invest in capital-investment projects would risk “large, negative effects on credibility, with consequences for interest rates”.
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