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Monetary policy on hold – but for how much longer?

The Bank of England’s (BoE’s) Monetary Policy Committee (MPC) last week voted to keep the Bank Rate on hold at 0.5% and to maintain the stock of asset purchases (also known as quantitative easing) at £375billion.

Although recent economic data have been pointing to a robust recovery, the decision was hardly surprising, according to the Cebr.

Economist Danae Kyriakopoulou said: “Under its policy of forward guidance, the MPC has committed to keeping rates low to support economic growth and employment at least until the unemployment rate falls to 7.0% from its current rate of 7.7% (provided three added “knock-out” conditions concerning inflation and financial stability are not breached sooner).

“The interesting question is then whether the MPC has shifted their expectations of the future trend of unemployment, a possible scenario according to the latest minutes from the Committee’s previous meeting in early September – minutes from this month’s meeting will be published on the 23rd of October.

“Recent data indeed suggest a more optimistic view of the future trend of unemployment, compared with the BoE’s current forecast which shows the unemployment rate remaining above 7.0% until 2016. The UK’s recovery has started spreading across all broad industry sectors, with Purchasing Managers Indices (PMIs) in construction, manufacturing, and services reaching multi-year highs.

“Furthermore, business confidence measures, such as the ICAEW/Grant Thornton Business Confidence Monitor also point to strong sentiment set to sustain growth in the near future. And all this comes alongside a relatively benign inflation backdrop as  slowing emerging markets ease global commodity prices.

“Overall, Cebr expects the UK economy to grow by at least 1.5% in 2013, and that growth in 2014 will comfortably exceed 2%, supported by strong business and consumer confidence. With the UK’s outlook continuing to improve, the Bank’s commitment to low rates until 2016 looks set to come under increasing pressure.”

 

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