Belfast Telegraph

Tuesday 16 September 2014

Bank upgrades forecast for economy

Bank of England governor Mark Carney is seen as an activist on monetary policy

The Bank of England has upgraded its forecast for the economy but policymakers are split over whether billions more pounds are still needed to support the burgeoning recovery.

Members of the Bank's Monetary Policy Committee (MPC) voted unanimously to keep the £375 billion quantitative easing programme at the same level for the time being while also leaving interest rates unchanged at 0.5%, minutes of the September meeting showed.

But disagreement over the strength of the recovery - amid a slew of positive signs from across the economy - hinted at future schisms over the path they will take.

The minutes of the meeting earlier this month revealed the Bank's experts now expect gross domestic product (GDP) to grow by 0.7% in the third quarter, up from a 0.5% estimate given last month.

But MPC members had varying opinions on how quickly the economy might return to full capacity and therefore whether it might need more QE support.

The minutes did not reveal whether governor Mark Carney - seen as an activist on monetary policy - was among the camp arguing in favour of an additional tranche of asset purchases in future.

"Members had different views about the extent to which a further loosening of monetary stance might be warranted, based in part on their judgments about the speed with which the degree of slack in the economy might be reduced if the momentum in demand continued to grow," the minutes said.

None of the committee members were in favour of cutting back on QE "at the current juncture", they also revealed.

The meeting was the first since Mr Carney announced the flagship "forward guidance" policy which will see interest rates remain at no more than 0.5%, subject to inflation, until the unemployment rate drops to 7%.

But it revealed apparent frustration by policymakers over the reaction of financial markets to the guidance and the perception that it should be communicated better.

Instead of being reassured that the Bank rate would be kept down until at least 2016, the City has brought forward its expectation of a rise by the middle of 2015 - pushing up market interest rates and blunting the impact of the guidance.

The MPC acknowledged that this may have been because caveats or "knockouts" to the policy designed to guard against runaway inflation were more stringent, and the unemployment rate threshold higher, than expected.

But the minutes said: "The committee agreed the need to emphasise in its public communication that the 7% threshold for the unemployment rate was not a 'trigger' that was mechanically linked to subsequent movements in Bank rate."

The members stressed that the unemployment rate threshold was instead to be taken as a "sensible point" to reassess the outlook.

Mr Carney has been at pains to press home the impact of the low-rates policy to ordinary members of the public, using his first speech last month in Nottingham to try to give confidence to individuals and businesses planning to invest.

Meanwhile, the MPC judged the likelihood of inflation reaching 2.5% in the next 18 to 24 months - a potential "knockout" to forward guidance - had fallen given the rising value of the pound.

However, some economists have cast doubt on whether the currency can be sustained at its current level, which is nudging close to 1.60 US dollars.

The minutes revealed that, after strong survey data from across the economy and an upgrading of second quarter GDP growth to 0.7%, Bank staff had lifted their forecast for the current period.

However there was some caution among MPC members over the strength of the recovery given the "erratically strong" contribution of exports to recent growth.

They also discussed the improving property market and the likelihood that it would boost overall growth but said the prospect of a "rapid real house price increases" would be of concern.

Mr Carney has said the Bank would be ready to intervene in the event of an unsustainable property bubble.

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