"If we can start to see improvement in productivity numbers, rates can stay lower for longer. If we don't we'll be facing supply pressure and price pressures, and rates will have to go up"
- Minoushe Shafik, BoE Deputy Governor
The Bank of England left its interest rates and asset purchase target unchanged despite criticism that policy makers send mixed signals on when borrowing costs will eventually start to rise and amid concerns that a strong local currency may choke off a recovery in Britain's economy. Thus, the Monetary Policy Committee agreed to hold off on adding to the 375 billion pounds of asset purchases and leave its benchmark interest rate at an ultra low of 0.5%. Despite the fact that there was no change in the policy, the central bank is set for action in the coming months with the BoE's new Deputy Governor Minouche Shafik hinting at a likelihood of narrowing BoE's estimate of the spare capacity in the economy from 1-1.5% of GDP next month and higher interest rates, which would benefit the Sterling with more yield. The currency has strengthened this year in anticipation of such a move. In January the Pound was trading at 1.6555 versus the U.S. counterpart, but has recently breached the $1.70 level and was trading at $1.7119 on Thursday, with no vivid reaction on the rate decision.
The IMF projects the U.K. to be the fastest-growing economy in the G7 countries this year. Rapid economic growth in the country has sparked speculation that the BoE will be the first among other developed countries' central banks to begin lifting interest rates.
© Dukascopy Bank SA