LONDON, England: The Bank of England meets on Thursday for its first monetary policy session since announcing that any rise in record-low interest rates would be tied to a drop in British unemployment.
The decision was intended to give a clearer view of the future curve of interest rates, but it has also generated new clouds of uncertainty against a background of unexpectedly strong growth.
However, that landmark policy statement means that this week’s two-day meeting of the BoE’s Monetary Policy Committee (MPC), starting on Wednesday, is expected to maintain rates and stimulus.
But this is despite market concerns over the impact of the “forward guidance” strategy.
Bank governor Mark Carney launched the bank’s new policy last month, stating that its key rate would remain at the current historic low of 0.50 percent until Britain’s unemployment rate falls to a threshold of 7.0 percent.
Such a drop in the unemployment rate is not expected to occur for three years, according to BoE projections.
But positive economic data has persuaded some traders that the central bank could start raising rates in the middle of 2015.
Carney has already warned that this move in so-called forward rates — market predictions of the future path of interest rates — could damage the fragile recovery.
“There is currently plenty of speculation in the market that the forward guidance outlined by governor Carney may not have had the desired effect,” said Rabobank analyst Jane Foley.
“After all, market rates are still pointing to the first BoE rate hike in mid-2015.”
Carney also stated last week that the BoE was ready to launch more stimulus measures if the economic recovery is hurt by market expectations of higher interest rates.
“Insofar as there is no real likelihood of a change in policy at the September BoE policy meeting, it should pass without event,” added Foley.
“That said, it is possible that the bank will feel it necessary to provide fresh direction to the market, suggesting there is a slim chance that a policy statement could be made.”
Recent official data showed that the unemployment rate remained at 7.8 percent in the three months to June, unchanged from three previous quarterly readings. That was above the key 7.0-percent threshold.