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Bank of England hints policy to remain loose

July 4, 2013

LONDON (AP) — The Bank of England refrained Thursday from pumping more money into the U.K. economy, citing signs of growth, as it held its first meeting since the arrival of the new governor, Mark Carney. But stocks rallied on expectations the central bank will keep its monetary policy loose for some time.

The Monetary Policy Committee kept its key interest rate at the record low of 0.5 percent and decided against expanding its stimulus program, as widely expected in the markets.

The bank has so far pumped 375 billion pounds ($579 billion) into Britain’s economy since 2009. Under the program, the Bank of England buys bonds from financial institutions with newly created money. The hope is the extra money will boost lending, helping economic growth.

In a statement, the Bank of England hinted that it would keep monetary policy loose to keep borrowing rates down.

It said that since May, “there have been further signs that a recovery is in train” but the recovery was weak by historical standards. It expects inflation, which is at 2.7 percent, to slow to the bank’s 2 percent target. That should allow the bank to keep its monetary policy loose for some time — unlike the U.S. Federal Reserve, which is planning to rein in its stimulus.

Stocks rallied and the pound dropped after the statement. The FTSE 100 stock index was up 2.6 percent while the pound slumped 1.3 percent against the dollar. A currency typically falls when monetary policy is loose.

Carney’s interest in explaining policy choices to the public was perhaps behind the publication of the statement. Under the previous governor, Mervyn King, the bank would typically issue no comment when policy was left unchanged.

Simon Hayes, chief UK economist at Barclays, said the statement “marks the dawn of a more active MPC communication strategy under the auspices of Governor Carney.”

The bank noted that it was planning to give an assessment next month to Treasury chief George Osborne on whether the bank should use forward guidance — an indication to the public on where interest rates are likely to be in coming months.

“This analysis would have an important bearing on the Committee’s policy discussions in August,” the statement said.

Carney used such thresholds during his previous job as the head of the Bank of Canada — the idea being that if people knew rates would remain low they would be more likely to borrow.

It helped stimulate spending and economic growth. The U.S. also uses this method, and analysts think Carney might try it in Britain.

“Any forward guidance on interest rates will be warmly greeted by homeowners, particularly those with tracker mortgages, who will be in a better position to budget and even forecast the right time to lock in,” Alistair Cotton, senior analyst at Currencies Direct said in a statement.

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