A New Beginning at the Bank of England

July 4, 2013

The old modus operandi at Britain’s central bank was to reveal useful information immediately after a policy meeting only if interest rates and/or unconventional monetary policy measures had been changed and otherwise to defer markets to published minutes due two weeks later.

Today’s statement following the first Monetary Policy Committee meeting under the governorship of Mark Carney breaks that precedent.  First, comments about economic trends in the U.K. are included.

Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile. In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time. Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term. Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

In addition, recent heightened global market volatility is noted, and the sharp rise in long-term interest rates is protested.

the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Most intriguing of all, the statement reveals that monetary officials are considering and may soon implement with the government’s permission forward interest rate guidance possibly with economic thresholds as the Fed uses.

The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.

Minutes of this weeks MPC meeting will be published July 17.  For now, the Bank Rate remains at 0.5%, the level since March 2009, and the ceiling on the asset purchase program stays at GBP 375 billion, its level since being raised a year ago.  A GBP 50 billion increase of the APP after the July 2012 meeting was completed by the time of the November meeting, and there have been no subsequent policy changes.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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