LONDON – Bank of England policymakers appear more optimistic over the British economy but are showing few signs of wanting to tighten monetary policy soon.
Minutes from the Oct. 8-9 meeting of the Monetary Policy Committee released Wednesday show all nine members voted to keep the main interest rate unchanged at the record low of 0.5 per cent and maintain monetary stimulus at current levels.
“The news on the month had continued to suggest a robust recovery in activity in the United Kingdom,” the minutes said. “Monetary stimulus remained considerable and confidence appeared to be rising.”
But it remains unclear as to whether such factors could produce a sustained recovery, particularly because the country needs its trading partners to also recover more firmly, the policymakers said in the minutes.
“The outlook for the United States seemed slightly softer on the month, the recovery in the euro area remained modest, and there remained a risk of a sharp slowdown in emerging economies,” the statement said. “Overall, therefore, there was a risk that the recovery in the United Kingdom might be less well balanced between exports and domestic consumption than was ultimately needed.”
The deliberations of the policymaking panel are being viewed through the prism of the bank’s new “forward guidance,” which new Governor Mark Carney introduced this summer. The purpose of the guidance is to provide markets, individuals and businesses a clear steer on where interest rates will be in coming months. The latest guidance was that rates would remain low until unemployment drops significantly. So the economy’s recent improvement has prompted many in the financial markets to wonder whether interest rates may rise sooner than originally anticipated.
The minutes show policymakers are in no hurry to alter policy despite the improved trends across the economy — but they are being vigilant.
The bank noted that unemployment, which stands at 7.7 per cent, was dropping a little faster than they anticipated when the Bank presented its latest quarterly economic update in August. That’s important because the core of the forward guidance is to keep interest rates at the current record at least until unemployment falls to a 7 per cent threshold. When it does so, policymakers will assess their stance.
The publication of the minutes had little impact on the pound, which was trading at $1.6145 in early afternoon trading in London. Though down 0.5 per cent on the day, the pound’s weakness is largely a function of the dollar’s recovery from widespread selling the previous day in the wake of soft U.S. unemployment data.
One positive factor cited by policymakers was the revival in the housing market, where mortgage approvals for house purchases rose strongly to around 62,000 in August. Part of the reason behind the strength of the housing market is the mortgage guarantee component of the Help to Buy Scheme, a government plan that helps homebuyers come up with their down payments.