U.K.: Monetary Policy Unchanged

Following Friday’s Monetary Policy Committee meeting, the Bank of England maintained its official rate at 0.5%, and the amount of asset purchases at 375£ billion. It will probably wait for the end of the summer before to consider a more accommodative policy.

Following today’s Monetary Policy Committee meeting, the last before Mark Carney takes office in July, the Bank of England maintained its official lending rate at 0.5%, unchanged since March 2009. The stock of asset purchases is maintained at 375£ billion.

■ The minutes of the meeting will be published on June 19, but this decision was expected. Indeed, growth prospects remain sluggish, but surveys (PMI, CE) suggest better prospects for activity in all sectors in Q2. The PMI composite index for activity, up by 2.2 points (to 54.6), reached its highest level since March 2012. Moreover, the Monetary Policy Committee probably takes some time to estimate the impact of the previous measures. The BoE had always announced an extension to the Funding for Lending Scheme (FLS) on 24th April 2013. This extension should secure the outlook for banks and building societies, and prompt them to lend to the U.K. economy. Households seem to benefit the most from previous measures. They have allowed a reduction in interest rates, with fixed-rate mortgages falling by around 84bp since last summer. Lending to households was up by 0.7% y/y in April.

■ Concerning the small and medium-sized enterprises, prospects for growth and confidence should continue to improve to prompt them to invest. A more accommodative policy could be likely. The BoE has some room for manoeuvre, since the government offered more flexibility to the BoE at the occasion of the 2013 budget statement of March 20.

■ The BoE seems more flexible about inflation, which remained above the 2% target despite a decrease of 0.3 point in April (to 2.4%). However the BoE should only pursue this policy from this summer onwards, as it must consider the effects of such measures on the British economy, make proposals in these areas in its August Inflation Report and wait for the arrival of Mark Carney.

BY Giovanni AJASSA

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