THE Bank of England (BoE) has hinted interest rates are likely to stay at 0.5% for some time yet as new Governor Mark Carney gave a first glimpse of what may be in store under his watch.
The Canadian's first Monetary Policy Committee (MPC) meeting ended as expected with interest rates and the level of quantitative easing (QE) unchanged at £375 billion.
However in a departure from its usual strategy the BoE issued a statement giving guidance about its decision which resulted in markets heading upwards.
In the statement the BoE said investors were being too quick to price in a rise in interest rates adding: "In the Committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy."
That information, coupled with the European Central Bank also indicating rates would stay at record lows of 0.5%, sent the FTSE 100 up by more than 3% yesterday - almost £50 billion - although the pound fell against the dollar.
Economists suggested the BoE issuing a statement appeared to be the first move towards a policy of forward guidance to reassure markets that interest rates would remain low in the future.
ING economist James Knightley said: "This is pretty aggressive stuff that has prompted a sharp move lower in sterling and suggests Mr Carney is in the dovish camp."
Rob Wood, chief UK economist at Berenberg, said: "Carney appears to be doing a good job of convincing his colleagues of the need for clear guidance to the markets and the public in order to keep market rate expectations in check and cement the recovery".
Some investors had started to price in a rise in UK interest rates from autumn next year or early in 2015 following a run of recent positive economic data.
However the BoE statement appears to push that timetable backwards with some economists now predicting rates at 0.5% for more than two-and-a-half years.
Scott Corfe, senior economist at the Centre for Economics and Business Research (Cebr), said: "In the UK, the MPC stated market expectations of future interest rate rises in the near future were unwarranted despite the improving economic backdrop.
"This led to a sharp fall in the value of sterling against both the dollar and the euro, as markets priced in a longer period of low interest rates. Cebr does not expect the base rate to rise until 2016."
Minutes of Mr Carney's debut MPC meeting to be published later this month will show how he played his hand, and whether he resisted the urge to push for more QE against more reticent fellow members of the committee.
His predecessor Sir Mervyn King was repeatedly outvoted 6-3 during his final months in charge as he sought to boost the QE stimulus programme by £25 billion. Many expect a fuller commentary from the MPC after the August meeting.
Stephen Boyle, head of Royal Bank of Scotland group economics, said: "With stronger economic data in recent weeks, it was unlikely that there would be a policy change in Mark Carney's first MPC meeting as the new Governor.
"But the minutes will be read like tea leaves for signs of a change in approach by the MPC. A move towards providing forward guidance is likely to be the first policy evolution in the Carney era."
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