BOE Keeps Stimulus in Place to Aid Recovery in Budget Squeeze
BOE keeps stimulus in place to aid recovery
Chris Ratcliffe/Bloomberg
Bank of England Governor Mervyn King.
Bank of England Governor Mervyn King. Photographer: Chris Ratcliffe/Bloomberg
Aug. 5 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, talks about European Central Bank and Bank of England monetary policy. Major also discusses his strategy for Treasuries. Bill Hubard, chief economist at MIG Bank SA, also speaks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
The Bank of England kept its bond- stimulus plan in place and left its benchmark interest rate at a record low as officials sustained emergency aid for the economy during the biggest budget squeeze since World War II.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the target for bond holdings at 200 billion pounds ($318 billion), matching the median estimate of 34 economists in a Bloomberg News survey. The bank kept the key interest rate at 0.5 percent.
A split among officials on the direction of policy widened in the past month as Andrew Sentance argued for higher interest rates to curb inflation and David Miles insisted the bank should be ready to buy more bonds. Economic growth reached the fastest pace in four years in the second quarter, though surveys show services, manufacturing and construction have since weakened.
“The decision will have been more closely contested than previously amid ongoing fretting about the pace of recovery,” David Page, an economist at Investec Securities in London, said in a telephone interview. “We don’t think we’ll see more quantitative easing but some members probably support that.”
The Bank of England’s rate decision was predicted by all 59 economists in a Bloomberg News survey. The European Central Bank today kept its interest rate at a record low of 1 percent, as predicted by all 51 economists in a separate survey.
Cameron’s Cuts
The pound, which has gained about 5 percent against the dollar in the past three months, was little changed after the Bank of England decision. The currency traded at $1.5903 as of 12:48 p.m. in London. The yield on the benchmark two-year government bond rose 1 basis point on the day to 0.79 percent.
Prime Minister David Cameron and Nick Clegg, his Liberal Democrat deputy, wrote to Cabinet colleagues this week to remind them that the most urgent issue facing Britain is “deficit reduction and continuing to ensure economic recovery.”
While the economy grew 1.1 percent in the second quarter, almost four times the pace of the previous three months, surveys by Markit Economics and the Chartered Institute of Purchasing and Supply suggest expansion slowed in July. Next Plc, Britain’s second-largest clothing retailer, yesterday reported that same- store sales fell 1.5 percent in the 26 weeks through July and forecast “more restrained” consumer spending.
BOE Forecasts
Miles told lawmakers last week that risks to economic growth have increased and “further asset purchases may be warranted at some point in the future.” Minutes of last month’s decision showed the bank considered expanding its so-called quantitative-easing program. King said that the central bank officials should “keep our foot firmly on the accelerator.”
The Bank of England in its decision today used new quarterly forecasts for gross domestic product and inflation incorporating the effects of the government budget squeeze, which will show weaker economic expansion, according to Alan Clarke, an economist at BNP Paribas SA in London.
“The GDP targets will have to be slashed to take into account the effect from the budget,” Clarke, the only participant in the Bloomberg News survey to forecast an increase in bond purchases today, said before the decision. “We should respond to fiscal tightening with more quantitative easing.”
Inflation Outlook
Sentance argues that the economy is strong enough to withstand “gradual” withdrawal of emergency aid, and voted since June for a quarter-point interest-rate increase. He says officials need to act to curb inflation expectations. Consumers questioned in July anticipated annual price gains of 2.7 percent in a YouGov Plc survey published by Citigroup Inc., compared with the 21-month high of 3 percent predicted in June.
Inflation was 3.2 percent in June and has exceeded the government’s 3 percent limit since March, stoked by higher commodity costs and the pound’s trade-weighted drop of about a fifth since the start of 2007. King said last week the rate is likely to exceed the bank’s 2 percent central goal “for much of next year” because of higher sales tax, though weakness in the economy then risks pushing it “significantly below” the target.
Economists predict that most Bank of England officials will opt to keep up the current level of stimulus until next year. The benchmark interest rate will rise to 1 percent in the second quarter, according to the median forecast of 37 economists in a Bloomberg News survey.
“The next move in policy will be an increase in interest rates next year,” George Buckley, an economist at Deutsche Bank AG in London, said in an interview before the decision. “There’s a huge amount of stimulus in the economy. Even with rates at 1 percent, they’re still at a level we’d never seen before the crisis.”
King will present the bank’s new economic forecasts at an Aug. 11 press conference and the bank will publish the minutes of today’s decision on Aug. 18. This meeting was the first for Martin Weale, who began a three-year term on the panel, replacing Kate Barker.
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
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