Equipped with fresh positive economic data, the Bank of England’s (BOE) Monetary Policy Committee decided to hold interest rates at 0.50% and make no changes to its 375 billion GBP asset purchase program. According to the policymakers, the U.K.’s fundamentals are improving, so there’s really no reason to… well, rock the boat. As the old adage goes, “If it ain’t broke, don’t fix it!”
It all makes sense too. Expanding the quantitative easing program would only give minimal benefits to the economy but greatly increase the risk of higher inflation. The U.K.’s current inflation rate stands at 2.8%, 0.8% higher than its official inflation target of 2.0%. Besides that, analysts are saying that the certainty surrounding future monetary policy is giving a lot of confidence to businesses and households.
Granted it’s still too early for the central bank to proclaim that sustainable recovery is happening, but the recent string of good economic data gives little reason for those who resisted further stimulus measures to change their stances.
As I’ve mentioned a few days ago, the country’s GDP report for the first quarter showed that the economy grew 0.3%, which was notably higher than the 0.1% increase the market had initially expected. Moreover, the positive figure established that the U.K. didn’t fall into another technical recession.
Leading indicators are also pointing to further growth. Below is a brief summary of the most recent PMI readings:
Even though both manufacturing and construction are still below 50.0 (the level that divides growth from expansion), they both came in much better than forecast. They were also significant improvements from the previous month’s readings. The services sector, meanwhile, is healthily growing.
If there’s any threat to the U.K.’s recovery, it will come from the outside rather than internally. The euro zone, which is the U.K.’s biggest export market, is expected to contract by 0.3% this year. This could negatively affect demand for U.K.’s exports and hurt the economy’s growth.
Assuming good data continues to come in, the BOE will likely keep the current monetary policy in place until Mervyn King gets replaced by a potentially more dovish Mark Carney in July. That being said, next month’s meeting (June) will probably be another non-event for the foreign exchange market.