Bank of England holds cards close to chest on guidance options

 The Bank of England kept investors guessing on Thursday as to whether it might be considering a change to its pledge to keep interest rates on hold as Britain's economic recovery picks up.

It also did not take the unusual step - but one which some investors had considered possible - of issuing a statement to address the speed at which Britain's unemployment rate is falling towards its threshold for considering a rate hike.

"No guidance on guidance yet," Investec economist Philip Shaw said in a note to clients. He said details of discussions among the BoE's policymakers on their options for changing guidance were likely to appear when minutes of this week's meeting are published on January 22.

Britain moved from being a laggard to a leader in terms of growth among the world's biggest economies last year.

Its economy is expanding by more than 3 percent in annualised terms although there are concerns the recovery could prove unsustainable, especially as wage growth remains weak.

The BoE said in August it will not think about raising rates until unemployment falls to 7 percent. Since then unemployment has come down much faster than the Bank expected, raising questions about how long it can hold off on raising rates.

But inflation has also fallen to within a whisker of its 2 percent target, reducing the pressure on the BoE.

After its two-day meeting, the Bank's Monetary Policy Committee kept interest rates at 0.5 percent, as expected by all the economists who took part in a Reuters poll.

It also left its bond-buying programme unchanged at 375 billion pounds.

The turnaround in Britain's economy contrasts with the situation in the euro zone, its main trading partner, where the European Central Bank is expected to use a news conference on Thursday to remind investors it could ease policy further.

The pace of Britain's recovery has helped the pound to strengthen by 5 percent against the euro and 10 percent against the dollar since the middle of last year.

Sterling strengthened briefly against the dollar after the MPC's announcement of no change in policy. British government bond prices rose slightly.

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Strong services data signals UK growth is on track to outstrip rest of Europe

PMI survey's all-sector reading hits 15-year high, with order books growing at fastest pace since Tony Blair became PM

Britain's recovery is on track to outstrip the rest of Europe following a strong performance by the services sector in August.

The purchasing managers index, published by Markit, jumped to a new post-financial-crash high of 60.5 in August, up from 60.2 in July and its highest level since December 2006.

Markit said the latest survey of the all-important sector, which accounts for around 78% of the economy, sent the all-sector PMI to its highest level since the series began in 1998.

Chris Williamson, the data provider's chief European economist, said growth was now accelerating in manufacturing, services and construction, and that GDP growth could exceed 1.0% in the third quarter of the year.

The broad-based nature of the recovery will encourage George Osborne, who in public has remained careful to highlight the risks to the recovery.

Williamson said the latest data showed that growth was principally supported by a rise in new business.

Order books at companies ranging from banks to restaurants rose at the fastest pace since May 1997, the month Tony Blair first became prime minister.

"There were many reports of an ongoing strengthening of market confidence which helped companies convert enquiries into hard contract wins. Marketing and an improvement in the housing market were also noted as reasons for higher sales volumes," he said.

However, hopes that growth would bring a quick end to persistently high unemployment were dashed after the survey of services firms showed a slowdown in hiring.

The sector reported a net increase in employment for an eighth month in a row, but the rate of growth was described as "marginal".

Markit said: "A number of panellists attributed the slowdown to the non-replacement of leavers or cost considerations."

The lack of jobs growth will dash expectations that the Bank of England will raise rates earlier than expected in 2016.

The Bank of England governor, Mark Carney, said last month that he wanted to wait until the economy created an extra 750,000 jobs before considering a rise in base rates.

Martin Beck, UK economist at Capital Economics, said the services survey "adds to the relentlessly good news on the UK economy".

He said: "Following surprisingly strong gains in August's manufacturing and construction surveys, today's services result at face value points to quarterly GDP growth in Q3 not far off a rip-roaring 2%.

"However, this does not necessarily indicate that interest rates will have to rise earlier than the MPC expects. In common with the manufacturing and construction surveys released earlier this week, the expansion in services output suggested by the CIPS survey was accompanied by a softening in the survey's employment balance, which dropped from 53.6 to 50.6.

"This supports our, and the MPC's, view that rising productivity will accommodate much of the recovery in demand, with the unemployment rate taking a stubbornly long time to fall to the Bank's 7% threshold."

Across Europe's major economies services firms signalled that a year-long recession was coming to an end, with the exception of Italy, which failed to improve on July's poor performance.

The Italian services PMI improved only slightly on the previous month following a rise from July's 48.7 to 48.8. The August figure means another monthly contraction, in an economy that is already expected to shrink steadily this year. The City had hoped for a number close to 50, the cut-off between growth and contraction.

Article Source : http://www.guardian.co.uk

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