Nov. 5 (Bloomberg) -- The Bank of England slowed the pace of bond purchases as signs of an economic recovery give policy makers scope to wind down their money-printing program next year.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, raised the amount of bonds it will buy to 200 billion pounds ($332 billion), the smallest increase since the program began in March. It was less than the median forecast of 225 billion pounds in a Bloomberg News survey of 48 economists. The pound rose and the price of U.K. government debt fell.

“The committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilized resources persists,” the central bank said in a statement. “That will continue to bear down on inflation for some time to come.”

The Bank of England is weighing signs that the economy is shaking off the slump against risks the flow of credit isn’t strong enough to underpin a revival. Prime Minister Gordon Brown’s government this week pledged more money to help two of the U.K.’s biggest banks, boosting the scale of the world’s most expensive bailout less than seven months before an election.

The size of the increase “is an indication that they’re close to finishing,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London who used to work at the central bank. “There’s a good chance they could hold fire in February. Clearly they won’t do anything until then.”

Market Move

The pound rose as much as 0.7 percent to $1.6617 after the decision and the 10-year gilt yield rose 8 basis points to 3.86 percent as of 12:20 p.m. in London. That compares with 3.64 percent on March 4, the day before the plan was announced.

Today’s decision was based on revised forecasts, which King will present on Nov. 11 when the central bank publishes its quarterly Inflation Report.

Chancellor of the Exchequer Alistair Darling, granting the Bank of England authority to expand the bond program, said in a letter to the governor that the plan has provided a “welcome improvement” in corporate credit markets. He said it makes it more likely that inflation will hit the bank’s 2 percent target.

The bank also maintained its key interest rate at a record low of 0.5 percent, as forecast by all 60 economists in a Bloomberg News survey. The European Central Bank left its benchmark at 1 percent, a separate survey showed. Yesterday, the Federal Reserve restated its pledge to keep rates “exceptionally low” for an “extended period.”

Asset Purchases

The Bank of England has already bought 175 billion pounds of assets, and the decision for an increase of 25 billion pounds was predicted by 13 economists. Twenty-five predicted a 50 billion-pound increase, and 10 saw no change.

The Bank of England’s decision to expand quantitative easing followed a report on Oct. 23 showing the economy unexpectedly contracted 0.4 percent in the third quarter. That extended the slump to six quarters, the most since records began in 1955. The U.S., Germany, France and Japan have already returned to growth.

The U.K.’s struggle to return to growth has prompted some economists to question whether bond purchases are having the desired effect. While services, manufacturing and house prices are showing signs of recovery, a gauge of money supply favored by the bank fell 1.7 percent in the third quarter, the weakest reading on record.

Ultimate Goal

“The question you’ve got to ask is what is QE designed to achieve,” said Peter Dixon, an economist at Commerzbank AG in London. “If the ultimate objective is to raise broad money growth and activity that’s not happening yet.”

Brown’s mounting debt load, swelled by this week’s bailout, may act as a drag on the economy over the next five years. The debt, already the highest since at least 1974, may rise to 100 percent of gross domestic product, says Roger Bootle, managing director of Capital Economics Ltd. and a former Treasury adviser. Spending cuts of 2 percent a year until at least 2014 may be needed to get the budget under control, he says.

The government on Nov. 3 said it will inject 25.5 billion pounds into Royal Bank of Scotland Group Plc, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide.

Brown is struggling to shore up his Labour Party’s popularity before a general election that must be held by June. The Conservative opposition led by 17 points in a poll by ICM Research Ltd. finished on Oct. 30.

Pause

For King, who pushed for an increase to 200 billion pounds last August, the next decision will be whether to pause the bond-purchase program once the new tranche is used up.

Former central bank policy maker DeAnne Julius said this week the lowest rates record are already starting to feed through the economy.

An index of U.K. service industries based on a survey of purchasing managers rose to 56.9 last month, the highest since August 2007, while a gauge of manufacturing expanded at the fastest pace in two years, the Chartered Institute of Purchasing and Supply and Markit Economics said this week.

Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, yesterday reported a “good start” to the third quarter. The pound has fallen about 5 percent against a basket of currencies of Britain’s main trading partners since early August, helping stoke demand for U.K. goods abroad.

“By the time we get to February hopefully we’ll get an expansion in fourth quarter GDP,” said Dixon. “Those are factors which suggest the BOE may not do more.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

Last Updated: November 5, 2009 08:05 EST