- Bank keeps policy settings unchanged
- Bank issues no further guidance
- Long-term Gilt yields rise to 2.95 per cent
Bank of England (BoE) rate setters chose not to comment on monetary policy as they kept interest rates at a record low and left their asset purchase programme unchanged.
Economists were watching to see whether the Monetary Policy Committee (MPC) would add to last month's first round of guidance under Governor Mark Carney in an attempt to tame growing market expectations of a rate rise.
In holding rates at 0.5% and bond purchases at £375bn, the BoE said: "The committee reached its decisions in the context of the monetary policy forward guidance."
Some expected further forward guidance
Markets responded to the BoE's lack of comment by pushing the rate on 10-year gilts to a two-year high of 2.95%. The five-year swap rate, which indicates expectations of future rates, also rose along with the pound against the dollar.
Kathleen Brooks, research director at Forex.com, said: "The lack of a statement today could make the BoE's job harder. It had an opportunity to further explain its stance on forward guidance in the face of better economic data. It could have also used rhetoric to push rates down.
"By not releasing a statement what else is the market expected to do apart from question the BoE's commitment to low rates?"
The BoE started using forward guidance on its intentions in August to give consumers and employers a firm footing for spending and investment decisions. However, market expectations of a rate rise increased despite Carney's warning in his first speech as Governor that an early increase could choke off the economy's recovery.
Some economists thought the MPC might accompany the rate decision with a statement that it thought increases in market interest rates were unwarranted. But others argued the Bank would hold off after a run of strong economic news.
In any case, the survey data has been stronger than expected
Britain's dominant services sector grew at its fastest pace for six years last month, a survey showed on September 4th. Business has also increased sharply in manufacturing and construction, the property market has revived and consumer confidence has taken off.
However, it is a well-known fact that the above survey data can be quite volatile. Furthermore, there are always the significant medium-term risks to watch out for in the Eurozone. Having said that, and as Simon Edelstone, the manager of the Artemis Global Select Fund told Sharecast on Thursday, historically consumer sentiment has tended to be an important driver of the UK economy and has been known to recover quite quickly at times.
Pegging the next rate rise to unemployment falling to 7.0% indicated the MPC did not expect to raise borrowing costs until late 2016 at the earliest. However, the strong economic indicators and concerns about inflation have prompted markets to expect a rate increase in mid-2015.
Economists at Capital Economics said the MPC decision could mask a split vote with some MPC members favouring more stimulus for the economy to reinforce its commitment to low rates.
"The MPC may have to take action to make its forward guidance more effective. It could just try to hammer home its point with more words. But Mr Carney's speech last week could hardly have been more dovish and yet it prompted little market reaction," they said.
The minutes of the meeting, released on September 18th, will show the vote and indicate whether some members argued for more bond purchases and if there was a split on issuing more guidance.
The MPC decided to reinvest £1.9bn of cashflows from the maturing of government bonds it holds back in the Bank's asset purchase scheme.