Bank of England keeps policy steady despite new remit

LONDON Thu Apr 4, 2013 7:56am EDT

A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010. REUTERS/Toby Melville

A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010.

Credit: Reuters/Toby Melville

LONDON (Reuters) - The Bank of England decided not to pump fresh money into its stagnant economy on Thursday, despite a new remit that gives it more leeway to disregard above-target inflation.

Further stimulus may still be on its way, however, after finance minister George Osborne tweaked the central bank's mandate two weeks ago.

He gave the bank stronger backing to ignore the series of one-off factors that have kept inflation above target for most of the time since the financial crisis.

The remit also paves the way for a broader review of the Bank of England's monetary policy when Mark Carney, who currently heads Canada's central bank, succeeds BoE Governor Mervyn King in July.

But for now there is no majority on the nine-member Monetary Policy Committee to add to the 375 billion pounds of government bonds it bought between March 2009 and October 2012, in line with economists' expectations.

Interest rates remained at a record-low 0.5 percent.

The British central bank's decision contrasts with that of the Bank of Japan, which has been under more overt political pressure to stimulate its economy. It shocked markets earlier on Thursday when it pledged to double its government bond holdings within two years.

Although King and two other policymakers backed restarting the BoE's asset-buying quantitative easing program in February and March, there has been no sign of a softening in the opposition of the other six members, who are more concerned about inflation and sterling weakness.

Sterling strengthened slightly against the dollar and June gilt futures fell to a session low after the bank's decision, as economists had seen a slim chance of action this month.

But economists think more stimulus is likely later in 2013, either when the central bank publishes a quarterly update to its economic forecasts next month or after the Carney's arrival.

"Although the MPC left policy on hold again today, we suspect that the decision was still a close one. And while the chances of more asset purchases in May have perhaps declined, we still think Mark Carney's arrival in July could jump-start the committee into action," said Samuel Tombs of Capital Economics.

Britain's economy has stagnated over the past two years as it struggles to move away from government spending and financial services and towards exports after the financial crisis.

After a 0.3 percent contraction in the last three months of 2012, it risks tipping into its third recession in less than five years - though a March services survey released on Thursday suggested it may eke out modest 0.1 percent economic growth.

The Bank of England will not publish details of the policy discussion at the two-day MPC meeting until April 17.

($1 = 0.6607 British pounds)

(Additional reporting by Olesya Dmitracova and William Schomberg; editing by Jeremy Gaunt)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
DeanMJackson wrote:
With a record-low 0.5 percent interest rate, no wonder Great Britain has been experiencing a “stall mode” economy for years, the expected return on investment is near zero percent! Of course, the BoE knows this, so the question is why has the BoE been following a “stall mode” economic policy for so many years now?

It’s not terribly difficult to understand how an economy grows, and it’s not via cheap credit expansion. The cost of credit has nothing to do with economic growth, EXPECTED RETURNS ON INVESTMENT has, and if interest rates are near zero percent, there is no expected return (interest) on investment.

Economics Primer:

What do people do when interest rates increase? They invest more (and consume less) because the return on investment is greater. The proceeds that would have gone towards consumption instead goes towards investment because the lure (interest) is higher. It is investment that leads to economic recovery via new technologies that (a) increases the amount of goods that can be purchased since investment has made those goods less expensive; and (2) provide new technologies that cut the cost of business.

What this means is that a properly functioning economy has a DECLINING price level. Economists that tell us that declining general prices are bad for the economy are shills for politicians who for political reasons need central banks and the boom in the economy that credit expansion can produce (when interest rates are high, otherwise a stock bubble will result).

Central Banks, and crony economists in the universities and elsewhere that salivate to the mention of “central bank”, tell us that we must maintain a stable price level otherwise the economy will free fall! Nonsense, entrepreneurs don’t need stable prices in order to know where to properly allocate labor, capital and natural resources to their most profitable avenues of production. In fact, the reason entrepreneurs exist is to determine (via competition) what real prices are, hence what the general price level is. What central banks are doing then, is to remove the entrepreneurial discovery process for prices from the market, and we’ve seen how well central banks are doing in that task!

Apr 04, 2013 7:40pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.