Bank of England breaks with tradition under new governor Mark Carney to explain its decision not to change monetary policy, signaling a tighter stance is still way off.
LONDON (CNNMoney)
The bank, under new Governor Mark Carney, broke with tradition and issued a statement explaining its decision to keep monetary policy unchanged.
The Bank of England kept bank interest rates at a record low of 0.5%, and decided not to add to its £375 billion asset purchase program.
Economists had played down expectations of any dramatic changes at the bank under Carney's new leadership this month, saying markets would probably have to wait until August when it could begin to issue forward guidance on interest rates along the lines of the Federal Reserve.
Thursday's meeting of the bank's monetary policy committee took place against the backdrop of improving economic data.
Recent business surveys suggest the U.K. economy may have grown by as much as 0.6% in the second quarter, double the rate seen in the first three months of the year, when it managed to avoid a triple-dip recession. House prices have also been on the rise.
But analysts have warned that the economy is still far from achieving the "escape velocity" Carney has been hired to help deliver.
Household finances are still squeezed by falling disposable incomes and government austerity measures, and loans to business and individuals are still choked. Turmoil in the eurozone remains a risk for U.K. exporters.
Related: Investors dumping bonds
Under former Governor Mervyn King, the Bank of England typically did not issue a statement when it left policy unchanged, following up two weeks later with the release of minutes of the meetings. But Carney and his colleagues decided they had to act now to signal their concern about the impact the rise in market interest rates may have.
"Carney appears to be doing a good job of convincing his colleagues of the need for clear guidance to the markets and the public in order to keep market rate expectations in check and cement the recovery," said Rob Wood, chief UK economist at Berenberg.
"No sooner is (King) out the door than the Bank of England is opining on future interest rates immediately after a policy decision."
In its statement, the bank said recent economic data was consistent with the bank's May outlook for growth and inflation.
"The significant upward movement in market interest rates would, however, weigh on that outlook; in the committee's view, the implied rise in the future path of the bank rate was not warranted by the recent developments in the domestic economy," it said.
IHS Global Insight chief economist Howard Archer said the bank's decision to issue a statement signaled a significant shift towards providing forward guidance on monetary policy.
"With gilt yields having recently been sent significantly higher amid increased global financial market turmoil, the monetary policy committee likely felt it was a good move to make it clear at an early stage that any tightening in UK monetary policy is a considerable way off."
First Published: July 4, 2013: 8:19 AM ET
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