Daily Management Review

Bank of England keeps Rates, Bond Purchases Unchanged but Hikes Growth Forecasts


09/15/2016




Bank of England keeps Rates, Bond Purchases Unchanged but Hikes Growth Forecasts
In order to maintain the size of its newly enlarged asset-purchasing program, the Bank of England opted to hold base interest rates at record lows on Thursday.
 
The base rate of 0.25 percent, which was cut in August, was decided to be held by the bank's Monetary Policy Committee (MPC) which voted unanimously in September to hold the rate. The government bond purchases at £435 billion and the corporate bonds purchases at up to £10 billion ($13.2 billion) were also decided to be held by the bank through a unanimous vote.
 
Additionally the third quarter growth forecast was scaled up to 0.3 percent from 0.1 percent, which it predicted last month.
 
"Since the August inflation report, a number of indicators of near-term economic activity have been somewhat stronger than expected. The committee now expects less of a slowing in U.K. GDP (gross domestic product) growth in the second half of 2016," the bank said in the minutes from its latest meeting.
  
So far the U.K.'s vote to leave the European Union in June has shown no sign of a major hit to the global economy, it added.
 
Following the shock of the leave vote, the bank had added large batch of stimulus measures last month to boost the economy and U.K. data has improved since the bank introduced the stimulus. Last month's Markit/CIPS U.K. services Purchasing Managers Index (PMI) rebounded sharply from July's 89-month low and the official retails sales data for August came in stronger than expected on Thursday. However how long the upbeat data trend will last is still unclear.
 
Before the end of the year, a further cut in the base rate was expected by the majority of members who expected to vote in favor, the minutes showed. This would likely take the rate to just above zero.
 
The bank would cut the base rate to 0.1 percent in the fourth quarter of 2016, forecast economists polled by Reuters on Thursday. However, market should not bank on rates remaining at ultra-low levels for a prolonged period, warned David Miles, a former member of the MPC, on Thursday.
 
The weaker pound, which slumped after the vote to leave the European Union on June 23 has also helped boost the U.K. economy. At $1.32 to the pound, sterling is down around 12 percent from the peak it hit just prior the referendum.
 
"Sterling has been trading very well, it has been very stable, but actually I wouldn't attribute so much of that to the Bank of England. Carney has been, in the last week or so, trying to recover a bit of credibility and suggest that it is down to their messages. But the market view is that is a little tenuous," Richard de Meo, founder of Foenix Partners, told CNBC on Thursday.
 
A list of senior secured corporate bonds that are eligible for purchase has been published by the Bank of England. FTSE 100 - listed BAT, British Telecom, Centric, GlaxoSmithKline, AstraZeneca and BAE Systems are included in the list. McDonald's, General Electric, IBM, Pfizer, Procter & Gamble, Apple and Wal-Mart are the Dow companies with eligible bonds.
 
(Source:www.cnbc.com) 






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