ECB, BoE leave rates unchanged
Summary
Earlier in the day, the Bank of England (BoE) left interest rates at a record low of 0.5 percent and its gilt purchase target unchanged at £375 billion (USD 617 billion), as expected. The European Central Bank (ECB) left its benchmark rate unchanged at record low of 0.25 percent on Thursday, in line with analyst expectations.
The European Central Bank (ECB) left its benchmark rate unchanged at record low of 0.25 percent on Thursday, in line with analyst expectations.
Earlier in the day, the Bank of England (BoE) also left interest rates at a record low of 0.5 percent and its gilt purchase target unchanged at £375 billion (USD 617 billion), as expected.
Market response to both announcements was muted. The euro continued its rise, while European stocks were broadly unchanged.
Yields on benchmark 10-year UK gilts were relatively unchanged, holding steady at 2.751 percent after trading at a session high of 2.754 percent.
Sterling showed a small spike against the dollar after the news, ticking higher to USD 1.674 before falling back down to USD 1.671.
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Market focus will now turn to ECB President Mario Draghi’s press conference at 1:30 p.m. GMT. The ECB is also expected to publish forecasts as far ahead as 2016 for the first time.
Speaking after the rate announcement, Daniel Lacalle of Ecofin forecast the euro would continue to strengthen.
“I think it (holding rates steady) gives a bit more time for the ECB to look at how the economy recovery pans out, especially into the very important second quarter of 2014,” he told CNBC.
BoE acts as expected
All 64 economists polled by Reuters this week did not expect any change of monetary policy by the BoE, with markets fully anticipating the decision.
The central bank also said that it agreed to start reinvesting cashflow from the UK sovereign bonds it had purchased with its quantitative easing program. It said it would reinvest the £8.1 billion (USD 13.5 billion) of cash flows associated with the redemption of gilts maturing on March 10. Analysts said that this extra announcement was the reason for the move higher in sterling and expected this to provide support for the currency heading into the end of the week.
“The decision to leave rates unchanged came as no surprise – while unemployment is falling and there are some signs of growth broadening into investment, we are yet to see an improvement in real wages,” said Andrew Goodwin, a senior economic adviser at the economic forecaster EY ITEM Club.
“The UK economy remains fragile, and raising rates prematurely could put a stick in the spokes of the recovery. Meanwhile, inflation remains in check, leaving the MPC (Monetary Policy Committee) room to focus on supporting growth.”
Howard Archer, an economist at IHS, believes that the central bank clearly wants to nurture the U.K. recovery and not risk “choking it off” by raising rates too early or too fast.
Thursday’s rate announcement marked five years to the week since the central bank cut its benchmark rate to record lows of 0.5 percent in a bid to increase lending and stimulate the economy. This measure is a benchmark for mortgages and savers all over the U.K. and was originally tied to the unemployment rate. U.K. savers have suffered during the past few years with deposits receiving a negative yield when inflation is factored in.
Read More: Five years on: what 0.5% rate has meant for the UK
However, improving economic data in the UK has increased expectations that the Bank of England would look to raise this rate. An improving employment figure also meant the Bank made changes in the way it gives guidance for when monetary policy could be changed.
Governor Mark Carney unveiled the “next phase” of this forward guidance in February. In a surprise to some analysts, Carney’s “second phase” of forward guidance did not link a rate hike to any specific economic indicator.
Read More: ‘Too much focus’ on rate hike: BoE’s Broadbent
Instead, he said the bank’s MPC would be “monitoring a broad range of indicators” including labor market participation, average hours worked, productivity, and wages. The bank will also publish forecasts of 18 more economic indicators for the first time.
Economists polled by Reuters this week now believe there is a 30 percent chance that rates could move higher this year, with an 80 percent chance they could move by the end of 2015. The same economists also gave a mixed picture on Carney’s new guidance. A quarter said that his new policy offered a more precise picture, whereas 22 percent said that it offered less clarity than when it was tied to the unemployment rate.
Goodwin said that he expected the Bank to remain cautious and only raise interest rates once the resilience of this nascent recovery was assured. His prediction is for this to occur in the third quarter of next year. Archer’s view is for rates to move higher in the second quarter of 2015.
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