BoE base rate likely to remain fixed until at least 2015

The pound dropped to a five-week low against the dollar after Bank of England Governor Mark Carney yesterday indicated that policy makers will keep interest rates at a record low for longer than investors had expected.

In an unusual move, viewed as providing guidance to the market, the BOE’s rate-setting Monetary Policy Committee concluded its monthly policy meeting with a statement saying that recent increases in borrowing costs “were not warranted by the recent developments in the domestic economy” and were likely to weigh on growth.

The BOE said that while there were signs that a recovery is underway, it stressed that it will be “weak by historical standards,” with the economy operating below its capacity “for some time.” That was intended to underline its message that a tightening in monetary policy is unlikely to be justified by the state of the economy for some time to come.

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Mark Carney, the new governor of the Bank of England, appears to have used his first policy meeting to introduce some form of guidance in an effort to encourage households and companies to drive faster growth with more spending and investment, free from any short-term worries that rates might shoot up.

In the last two years there has been a slow upward creep in commercial borrowing costs despite a record low BOE policy rate, and this highlights the need for forward guidance from the central bank.