UPDATE 1-Bank of England holds cards close to chest on guidance options

Thu Jan 9, 2014 8:20am EST

* BoE keeps rates on hold, no change in asset purchase plan

* No statement from policymakers

* Speculation grows that Bank will tweak guidance plan

By William Schomberg and David Milliken

LONDON, Jan 9 (Reuters) - The Bank of England kept investors guessing on Thursday as to whether it might be considering a change to its pledge to keep interest rates on hold as Britain's economic recovery picks up.

The BoE left monetary policy unchanged after its Jan. 8-9 rate-setting meeting, sticking to its plan to hold borrowing costs at a record low until the country's surprisingly fast economic turnaround broadens out.

It also did not take the unusual step - but one which some investors had considered possible - of issuing a statement to address the speed at which Britain's unemployment rate is falling towards its threshold for considering a rate hike.

"No guidance on guidance yet," Investec economist Philip Shaw said in a note to clients. He said details of discussions among the BoE's policymakers on their options for changing guidance were likely to appear when minutes of this week's meeting are published on Jan. 22.

Britain moved from being a laggard to a leader in terms of growth among the world's biggest economies last year.

Its economy is expanding by more than 3 percent in annualised terms although there are concerns the recovery could prove unsustainable, especially as wage growth remains weak.

The BoE said in August it will not think about raising rates until unemployment falls to 7 percent. Since then unemployment has come down much faster than the Bank expected, raising questions about how long it can hold off on raising rates.

But inflation has also fallen to within a whisker of its 2 percent target, reducing the pressure on the BoE.

After its two-day meeting, the Bank's Monetary Policy Committee kept interest rates at 0.5 percent, as expected by all the economists who took part in a Reuters poll.

It also left its bond-buying programme unchanged at 375 billion pounds ($618 billion).

The turnaround in Britain's economy contrasts with the situation in the euro zone, its main trading partner, where the European Central Bank is expected to use a news conference on Thursday to remind investors it could ease policy further.

The pace of Britain's recovery has helped the pound to strengthen by 5 percent against the euro and 10 percent against the dollar since the middle of last year.

Sterling strengthened briefly against the dollar after the MPC's announcement of no change in policy. British government bond prices rose slightly.

KEEPING EXPECTATIONS IN CHECK

Governor Mark Carney has sought to dampen speculation about an early rate rise, stressing how Britain's economy remains 2 percent smaller than before the financial crisis, unlike many other industrialised nations which are now bigger than in 2008.

He and other policymakers have said repeatedly that the 7 percent threshold is not an automatic trigger for a rate hike.

But with unemployment falling to 7.4 percent at its most recent reading and expected to drop further in coming months, some economists say the BoE will have to tweak its guidance on when it will start to consider raising interest rates.

In a Reuters poll published last week, 13 of 41 economists said the BoE would need to lower its 7 percent jobless rate threshold, mirroring a move taken the U.S. Federal Reserve.

Economists say the MPC might choose to change or scrap the guidance plan as soon as next month. It is due to hold its next policy meeting on Feb. 6 and publish a quarterly inflation report and hold a news conference on Feb. 12.

Rob Wood, a former BoE economist, said the time had come to drop guidance.

"They should certainly not lower the unemployment threshold, which would just make a mockery of the guidance policy," said Wood, who works at Berenberg bank. "What is the point of giving guidance if the BoE can shift the goal-posts whenever it likes?"

Britain's fast-recovering housing market has added to the speculation that the BoE might have to tighten monetary policy sooner than it originally intended.

But Carney has stressed that the Bank has a range of tools it can use to tackle the risk of a property bubble, such as curbs on mortgage lending, without resorting to the "blunt instrument" of raising interest rates.

Data published earlier on Thursday showed the trade deficit, another weak point of Britain's recovery, barely narrowed in November although exports to its main trading partners in the euro zone picked up.

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