The Bank of England's Monetary Policy Committee (MPC) today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5 per cent.
The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375bn and to re invest the cash flows of £6.6bn associated with the redemption of a tranche of the Asset Purchase Facility's holdings which is about to mature.
As is customary in those months when the monetary authority publishes its quarterly inflation report, after today's meeting the BoE released a detailed statement outlining its current policy stance.
The monetary authority says that it believes the UK economy is set for a slow but sustained recovery in both demand and effective supply. Of particular interest, it points out the fact that "looking through the influence of temporary factors, overall output appears to have been broadly flat. In large part that reflects sharp falls in particular sectors of the economy that are unlikely to be repeated in 2013. In contrast, the combined output of the manufacturing and services sectors has grown modestly," it said.
The BoE added that the weakness in overall output sits in sharp contrast to continued strong employment growth, suggesting that the financial crisis may have had some impact on the effective supply capacity of the economy.
In any case, the risks are weighted to the downside, not least because of the challenges facing the euro area, it went on to say.
Appropriate to look through temporary inflation
As regards inflation, the MPC thinks it is likely to rise further in the near term and that it may remain above the 2% target for the next two years, although it is expected to fall back to around the target thereafter, as a gradual revival in productivity growth dampens increases in domestic costs and external price pressures fade.
Particularly worth noting, it points out that, as long as domestic cost and price pressures remain consistent with inflation returning to the target in the medium term, it is appropriate to look through the temporary, albeit protracted, period of above-target inflation.
Attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.
The MPC's remit is to deliver price stability, but to do so in a way that avoids undesirable volatility in output, the Committee explains.
The Committee's latest inflation and output projections will appear in the Inflation Report to be published at 10:30am on Wednesday February 13th.
Commenting on the Bank's statement, economists at Barclays Research were pointing out that "This statement highlights the acute dilemma faced by the MPC. The weak activity outlook begs for more stimulus, but the inflation outlook is not sufficiently benign to make the committee comfortable expanding policy further. Assuming the recovery does take hold - and the early indications for the first quarter are promising on this front - we would not expect the MPC to sanction more stimulus, but the debate remains live."