BoE says rising yields to weigh on growth expectations

New governor Mark Carney decided to hold interest rates at 0.5% at first policy meeting

The Bank of England, at its first policy meeting under new governor Mark Carney (pictured), said a recent rise in bond yields was not warranted by the state of the British economy. Photograph: Jason Alden/Bloomberg.

The Bank of England, at its first policy meeting under new governor Mark Carney (pictured), said a recent rise in bond yields was not warranted by the state of the British economy. Photograph: Jason Alden/Bloomberg.

Thu, Jul 4, 2013, 12:55

The Bank of England, at its first policy meeting under new governor Mark Carney, said a recent rise in bond yields was not warranted by the state of the British economy and signalled it could give further guidance on interest rates next month.

The Bank’s Monetary Policy Committee voted against reviving its bond-buying programme and kept interest rates at a record 0.5 per cent low, as widely expected.

But the MPC took the unusual step of issuing a statement even though it made no new policy moves. The statement said the “significant upward movement” in yields would weigh on its expectations for growth and inflation.

“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,” the statement said.

Sterling fell to a one-month low against the dollar and British government bond yields fell sharply as investors took the statement as a sign that the BoE would move to push back expectations of when it might eventually raise rates.

Mr Carney has been tasked with speeding up Britain’s sluggish economic recovery by finance minister George Osborne, who asked him to report back next month on whether the BoE should give more detailed guidance on the future path of interest rates.

The MPC said this debate could affect its August 1st rate decision. “This analysis would have an important bearing on the Committee’s policy discussions in August,” the MPC said.

Some economists said the statement might also herald a restart of bond-buying by the central bank under Mr Carney.

“I think it’s a cert there’ll be guidance in August, and then the question is whether there will be asset purchases as well,” said David Tinsley, an economist at BNP Paribas.

Yields on gilts, like those on other government bonds, had risen sharply since Ben Bernanke, chairman of the US Federal Reserve, spelled out in June a possible timetable for the US central bank to reduce and then end its bond-buying programme.