September 4, 2013 / 11:06 PM / 5 years ago

Bank of England likely to pause after Carney changes

LONDON (Reuters) - The Bank of England is expected to take a breather when it announces its latest policy decision on Thursday after a hectic couple of months under new governor Mark Carney which has seen the economy show fresh signs of life.

Bank of England governor Mark Carney gestures during a news conference after addressing business leaders in Nottingham, central England August 28, 2013. REUTERS/Nigel Roddis/Pool

Having warned financial markets in July against premature bets on an interest rate hike and set out in August its new plan to keep rates on hold until 2016, the central bank probably held off on new moves at its September meeting.

Signs of a surprisingly strong recovery in the economy are a welcome change for policymakers who have struggled to get growth going for much of the past three years.

But it has added to skepticism in financial markets about the BoE’s ability to keep rates at a record low of 0.5 percent for so long, raising the prospect of higher borrowing costs for consumers and companies that could hamper the recovery.

Strong manufacturing and services surveys this week prompted some economists to predict that growth in the third quarter could speed up to more than 1 percent, much stronger than the BoE’s forecast of about 0.6 percent.

“I suspect they will talk about the pace of growth, whether it’s just a short surge, or whether they are wildly wrong with their forecasts that growth will struggle for the next year or two,” said Rob Wood, an economist with Berenberg bank in London.


Disagreement among policymakers may have intensified since minutes of their August policy meeting - traditionally issued a week or so later - showed differences.

One member of the Monetary Policy Committee (MPC) voted against the forward guidance plan out of concern it would undermine the bank’s inflation-fighting credibility. Others said there was probably a case for buying more government bonds in the future to give the recovery an extra boost.

A couple of MPC members might now have voted to pump more money into the economy, economists said. Carney last week said the BoE might give more help to the economy if the recent rise in market interest rates added to risks for the recovery.

But the recent signs of stronger growth have probably reinforced the opposition of the majority to more bond-buying.

Some committee members, on the other hand, may wonder if markets really are wrong to price in a rate hike earlier than the BoE’s guidance of late 2016 - making it harder for the bank on Thursday to repeat its statement of July.

“There are probably some doubts creeping in to the MPC’s thinking about whether market expectations are totally unwarranted,” said Allan Monks, an economist with JP Morgan.

The BoE has tended to make statements only when it made big changes to policy but July’s warning on rates prompted some speculation that under Carney statements might be more regular.

Carney in general can point to some evidence that supports the bank’s plan to keep interest rates on hold until unemployment falls to 7 percent, something it only expects in late 2016.

This week’s strong manufacturing and service surveys showed employment growth lagging the overall strength in both sectors.

The bank is also expected to announce on Thursday how it will reinvest proceeds from 1.9 billion pounds’ ($2.95 billion) worth of maturing British government bonds from its stock of gilts bought under its quantitative easing program. ($1 = 0.6439 British pounds)

Editing by David Milliken and Patrick Graham

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