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Bank of England Maintains Interest Rates At Historic Low

By Mani
Updated on

Bank of England’s Monetary Policy Committee at its meeting today voted to maintain Bank Rate at 0.5%, to aid the U.K. economy’s ongoing recovery.

Investors anticipate the central bank to begin lifting its benchmark interest rate early in 2015.

Keeping a close eye on market

During the past nine months, the U.K. economy has hit its stride, following a long period of stagnation. The International Monetary Fund anticipates the economy to expand by 2.9% in 2014, the fastest rate of growth among the Group of Seven leading developed economies.

However, Britain’s return to growth has sparked fears of a housing bubble. The Monetary Policy Committee concluded its two-day meeting Thursday, figures released by mortgage lender Halifax showed house prices rose by 3.9% from April, the largest monthly gain since October 2002.

Hence the U.K’s central bank officials are keenly watching the market for signs that borrowers may be taking on too much debt, which could slow the economy and threaten the stability of the financial system.

Bank of England’s forward guidance

In August, Bank of England’s Governor Mark Carney, in his first quarterly inflation report conference, indicated the Monetary Policy Committee intends not to raise the bank rate from its current level of 0.5% at least until the unemployment rate hits the threshold of 7%.The forward guidance marked one of the new governor’s first departures from the reign of his predecessor, Mervyn King. The guidance is similar to that issued by the Federal Reserve in the U.S.

However in April, the U.K. unemployment rate had fallen to the lowest level in five years, dropping just below the 7% threshold that the Bank of England had set for when it might consider raising interest rates. Richard Barley of The Wall Street Journal pointed out that BoE had assumed that 7% unemployment was still a few years away instead of just eight months when Bank of England’s governor Mark Carney tied interest rate guidance to the unemployment rate last August.

In a note released after today’s decision by the Bank of England, IHS Global Insight said that is now anticipates a rate increase to 0.75 in February, several months earlier than its previous forecast. The forecasting firm said: “it now looks far from inconceivable that the Bank of England could act before the end of 2014”.

Interestingly, the previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on March 5, 2009.

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