MPC keeps policy settings unchanged, as expected

As expected, at today´s meeting the Monetary Policy Commitee (MPC) opted to maintain the Bank of England's rate at 0.5 per cent and the stock of asset purchases fixed at 375bn pounds."The Committee reached its decisions in the context of the monetary policy forward guidance announced alongside the publication of the August 2013 Inflation Report," the MPC´s announcement read. The minutes of the meeting will be published at 09:30 on Wednesday October 23rd.The move comes as no surprise, particularly given the recent pick-up in UK activity indicators. There are several important debates going on in the background with regards to house prices and "forward guidance". But a better understanding of BoE policymakers´ latest thinking on these subjects will have to wait until the release of the minutes. Coincidentally, just yesterday the International Monetary Fund´s (IMF) Global Financial Stabilty report highlighted how the government´s Help to Buy scheme threatens to reduce the affordability of housing for first time buyers. It may have worthwhile goals but it may also have unintended consequences. Nevertheless, and as some observers point out, house prices gains have been largely limited to London and the Southeast so far. Also on Tuesday the IMF was forced to upwardly revise its forecast for UK economic growth next year to 1.4% from 0.9% before. Implicitly that amounts to a certain endorsement of the current policies of Britian´s economic authorities. Regarding "forward guidance," Bank of England Governor Mark Carney has gone on record as saying that the economic recovery in the UK is still too narrowly based, on housing and activity and the City foremost.Balancing that, the Bank of England´s chief economist is of the opinion that markets have misunderstood "forward guidance," having gone to pain's to explain that it does not mean that the MPC could not move sooner. Financial futures are now pricing in a first rate hike in the BoE´s main policy rate by the first quarter of 2015, versus mid-2016 for the MPC´s own forecasts. That is largely due to the fact that markets have focused on their own projections for the path of unemployment going forward and when they believe it will hit the Bank´s threshold of 7.0% "to reconsider" a tightening in policy - all else equal. Could the MPC´s so-called "knock-out" clauses be triggered in the meantime? In the opinion of Barclays Research the answer is no. "The inflation outlook appears relatively benign and there are no obvious threats to inflation expectations," they explained to clients."The stage seems set for a protracted period of monetary inaction," they added.Acting as a backdrop, at least for now at least two of the factors which had been worrying market participants - and perhaps the MPC as well - of late have passed on to the backburner. Fed tapering is now increasingly being priced in to take place at the December US FOMC meeting, instead of October. As well, sentiment towards the Eurozone periphery has improved somewhat, both in relation to Italy as well as Spain, although the situation is still quite delicate to say the least. No member is thought to have voted in favour of additional easing at today´s meeting. Dr. Howard Archer, Chief European&UK economist at IHS Global Insight said: "[...] Meanwhile, any change in interest rates is clearly a long way off, whether or not unemployment ends up falling more rapidly than the Bank of England currently expects."The bar for any more QE now looks to be very high. It will likely only occur if the economy loses substantial momentum over the coming months, or if there is major financial turmoil and a sharp upward move in market interest rates when the US Federal Reserve finally starts to taper. Our central scenario is that neither of these events will happen, but neither can be ruled out."Dr. Archer is forecasting a first increase in the Bank rate by the last quarter of 2015. AB