King Says ‘Far Too Soon’ to Call End to BOE Bond Plan (Update1)

Feb. 10 (Bloomberg) -- Bank of England Governor Mervyn King said it’s “far too soon” to say officials will make no new purchases through the bond program as the central bank forecast inflation will undershoot its target over the next two years.

Bond yields fell after the remarks, which came less than a week after the bank paused the program at 200 billion pounds ($313 billion). Policy makers today also cut their forecast for economic growth. Inflation will peak at about 3.3 percent before slowing as low as 0.9 percent and staying below the goal of 2 percent, the forecasts showed.

“It is far too soon to conclude that no more purchases will be needed,” King told reporters in London at the Bank of England’s quarterly press conference. “The committee will keep its options open, and further purchases will be made if they prove necessary to keep inflation on track to meet the target in the medium term.”

Policy makers are weighing the risk of an economic relapse against the danger that too much money in the economy will fuel inflation. While the U.K. emerged from the worst recession since World War II in the fourth quarter, growing 0.1 percent, former policy maker Charles Goodhart said in an interview today there’s a “great fear” that it contracted again at the start of 2010.

The Bank of England’s forecasts show annual gross domestic product growth will reach about 3.2 percent in the second quarter of 2011, compared with about 4 percent previously.

“Spare capacity will press down on inflation in the medium term,” King said. “It is more likely than not that inflation will be below the target for much of the forecast period, but the risks are broadly balanced by the end.”

Bond Yields

The pound fell 0.4 percent today to $1.5631 as of 12:23 p.m. in London. The yield on the benchmark two-year government bond dropped 10 basis points to 1.108 percent.

Pre-election uncertainty on the prospects for the budget deficit is clouding the Bank of England’s forecasts at a time when investor concern on European sovereign debt is gripping financial markets.

Germany is weighing strategies to underpin confidence in Greece as Prime Minister George Papandreou tries to convince investors his proposals will tame the region’s biggest budget deficit. His plan is being challenged today by labor union strikes that have shuttered schools, hospitals and flights.

Speculation a rescue will be agreed triggered turmoil in the credit-default swaps market, with contracts on Greece yo- yoing as much as 80 basis points yesterday, UniCredit SpA prices show. European Union leaders will discuss Greece’s shortfall tomorrow.

Recession Damage

British Prime Minister Gordon Brown has said the biggest mistake the U.K. could make would be to withdraw economic stimulus measures too early. The recession, which lasted for six consecutive quarters, shaved 6 percent off gross domestic product. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949.

Brown’s Labour Party is catching up with the opposition Conservatives in voter opinion polls ahead of an election that must happen by June. The Conservatives’ lead shrank to 7 percentage points from 10 points a month earlier following the Jan. 26 report that the recession ended.

King said the prospect of a hung parliament, where no party wins enough support for a majority, doesn’t concern policy makers at the central bank.

“I don’t think this is something which has concerned the Monetary Policy Committee,” he said. “There is a broad consensus across all political parties on the need to announce more clearly the measures required for fiscal consolidation”

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net