Bank of England remains on hold, says Schroders’ Zangana

Azad Zangana, Schroders European Economist, comments on the Bank of England decision to keep interest rates at record low rate of 0.5%

The Bank of England’s Monetary Policy Committee opted to keep interest rates on hold at the record low rate of 0.5%. In addition, the Bank did not restart its asset purchase programme, also known as quantitative easing. We now await the Inflation Report, which will be accompanied by an assessment of the Bank of England’s set of monetary policy tools, including the possible introduction of forward guidance on interest rates.

No signs of the monetary activism we were promised, but the decision to keep policy on hold comes against a backdrop of improved growth. This morning, the Markit Purchasing Managers Index (PMI) for manufacturing activity rose to its highest level since March 2011, while activity in the housing market continues to gather momentum, largely thanks to the government’s stimulus measures.

Looking ahead, we expect forward guidance on interest rates to be introduced in the near future along with scenario analysis to explain how the Bank of England would react if the economy was to surprise significantly on the upside or downside. At the juncture, given the improvement in economic activity, we do not expect the Bank to add any additional stimulus, at least, not without another significant slowdown or rising risk of recession. Given the severe headwinds the UK economy faces, those downside risks are by no means gone. However, we expect a cautiously more optimistic tone from the new governor at his Inflation Report debut.

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