Bank of England Keeps Monetary Policy Unchanged in February


The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

Excerpt from the statement from the Bank of England:

The MPC continues to judge that the UK economy is set for a slow but sustained recovery in both demand and effective supply, aided by a further easing in credit conditions – supported by the Bank’s programme of asset purchases and the Funding for Lending Scheme – and some improvement in the global environment.  But the risks are weighted to the downside, not least because of the challenges facing the euro area. 

Inflation has remained stubbornly above the 2% target. Despite subdued pay growth, weak productivity has meant no corresponding fall in domestic cost pressures.  And increases in university tuition fees and domestic energy bills, largely resulting from administrative decisions rather than market forces, have added to inflation more recently. CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years, in part reflecting a persistent inflationary impact both from administered and regulated prices and the recent decline in sterling. But inflation is expected to fall back to around the target thereafter, as a gradual revival in productivity growth dampens increases in domestic costs and external price pressures fade.
 
The Committee discussed the appropriate policy response to the combination of the weakness. Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term. The Committee judged that its policy stance was fully consistent with that remit. The Committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.
 
Against that backdrop, the Committee decided that it was appropriate to maintain Bank Rate at 0.5% and the size of the asset purchase programme at £375 billion in order to meet the 2% CPI inflation target over the medium term. The Committee also noted that the Asset Purchase Facility’s holdings of the March 2013 gilt would mature at the time of the Committee’s next meeting.  The Committee voted that it would re-invest the cash flows of £6.6 billion associated with this redemption.

Bank of England | Nuno Fontes | nuno@tradingeconomics.com
2/7/2013 12:08:04 PM