BOE Holds Bond-Purchase Plan on Signs Economy Will Withstand Spending Cuts

The Bank of England kept its emergency stimulus program unchanged after recent data suggested the economy may be strong enough to weather the government’s impending spending cuts, undermining the case for more aid.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held its bond-purchase plan at 200 billion pounds ($315 billion), as forecast by all 34 economists in a Bloomberg News survey. The bank also kept its main interest rate at a record low of 0.5 percent.

Manufacturing and services data indicate the recovery sustained momentum in the fourth quarter. While spending cuts to tackle the record budget deficit may curb expansion, inflation remains above the bank’s target and policy makers have split three ways on whether to raise rates to tame price growth or add to stimulus.

“The news that we’ve had through the month has been fairly positive, particularly in the manufacturing sector,” Philip Rush, an economist at Nomura International Plc in London, said in a telephone interview. “It seems too much of a communication challenge to do any kind of easing now, taking that off the cards completely in our view.”

The pound was little changed against the dollar after the decision and was down 0.1 percent at $1.5750 as of 1:12 p.m. in London. The yield on the 10-year gilt was 4 basis points lower at 3.504 percent.

Photographer: Chris Ratcliffe/Bloomberg

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Photographer: Chris Ratcliffe/Bloomberg

Traffic passes the Bank of England in London.

Positive Data

U.K. manufacturing growth unexpectedly accelerated to the fastest pace in 16 years in November as export orders climbed, and an index of services stayed close to a four-month high, surveys last week showed. Gross domestic product increased 0.6 percent in the three months through November, more than the 0.5 percent recorded in the quarter through October, the National Institute of Economic and Social Research, whose clients include the Bank of England, said on Dec. 7.

“Quantitative easing will not be restarted unless there is a very severe slowdown in activity,” said Azad Zangana, an economist at Schroders Investment Management in London and an ex-Treasury official.

Other central banks have already added to measures to protect their economies. Federal Reserve Chairman Ben S. Bernanke said this week he may expand bond purchases beyond the $600 billion announced last month. The European Central Bank postponed its withdrawal of emergency stimulus last week and stepped up government-debt purchases.

Euro Crisis

At the Bank of England, policy maker Adam Posen has called for an expansion of the bond program, saying the fiscal squeeze will undermine domestic demand. The Office for Budget Responsibility, the Treasury’s fiscal watchdog, forecasts that the cuts will lead to the loss of 330,000 public-sector jobs by 2015. It cut its 2011 growth forecast to 2.1 percent from 2.3 percent on Nov. 29 and said the economy faces a “sluggish” medium-term outlook.

Britain’s economic prospects may also be hampered by the crisis engulfing the euro region, Britain’s biggest export market. The European Union and the International Monetary Fund on Nov. 28 agreed on an aid package for Ireland to try to stem contagion to other countries.

King told lawmakers on Nov. 25 that “a healthy European recovery is important to the ability of the U.K. economy to rebalance.” The strength of imports may hamper a shift away from domestic consumption the central bank is counting on. Data today showed the trade deficit unexpectedly widened in October as record imports overshadowed an increase in exports.

Inflation Risk

Europe’s debt crisis is “a risk you have to take into account,” Joost Beaumont, an economist at ABN Amro in Amsterdam, said in a telephone interview. “If this continues it will make the MPC less inclined to start raising rates. Currently the majority is very comfortable with the wait-and-see stance and the recent data has confirmed them in their view.”

Even as growth is threatened, an inflation rate above the government’s 3 percent upper limit may curb policy makers’ appetite for further loosening. King was forced to write his fourth letter this year to the government after consumer prices increased an annual 3.2 percent in October. He said last month that inflation was “likely to remain elevated” throughout next year.

Policy maker Andrew Sentance has argued for an interest- rate increase since June, citing the risk inflation expectations may become dislodged. His colleague Spencer Dale said in a speech last week that the combination of high inflation and loose policy made for an “uncomfortable juxtaposition.”

“With inflation so high I don’t think the Bank of England will feel that it’s credible with their mandate to be loosening policy any further,” Daiwa’s Mehta said.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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