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Bank of England leaves policy unchanged as recovery takes shape

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Bank of England leaves policy unchanged as recovery takes shape

The Bank of England announced no changes to monetary policy at its October rate decision, leaving interest rates at record lows as economic recovery gains traction.

The Bank of England’s Monetary Policy Committee voted once again to keep its benchmark lending rate at 0.5 percent, adhering to Mark Carney pledge to keep rates low until the unemployment rate falls below 7 percent. Back in August the central bank governor tied interest rates to the unemployment rate in a bid to reassure borrowers lending terms will remain favourable for the next few years. The pace of economic growth has created skepticism toward Carney’s forward guidance, with many market participants believing the unemployment rate will fall below 7 percent well ahead of the mid-2016 timetable. Interest rates have been marked at 0.5 percent since March 2009.

The sluggish UK economy has gained traction over the past several months, led by strong employment growth and a growing service economy. The service economy grew at its fastest rate in 16 years during the third quarter, which suggests the economy is on its way toward full recovery. However, the economy’s total output remains well below pre-crisis levels, and market participants were reminded of this fact earlier in the week when the Office for National Statistics reported weak manufacturing and industrial production growth in September.

The International Monetary Fund upped its growth forecast for the UK to 1.4 percent this year and 1.9 percent next year. As the economy gains traction, market participants will keep their eyes on domestic UK policy and broader global conditions. UK growth remains weak when contrasted with comparable advanced economies. This means the BOE will likely adopt a “wait and see” approach to monetary policy. Carney’s forward guidance is an attempt to convey as much. According to Howard Archer of IHS Global Insight, “The bar for any more QE now looks to be very high.” The central bank didn’t introduce any new easing measures at its October rate decision, opting to leave the asset purchase facility unchanged at £375 billion.

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