BOE May Increase Its Asset-Purchase Target to $510 Billion, Economists Say

The Bank of England will raise its target for asset purchases next week as the debt crisis in Europe may have already pushed Britain’s economy into a second recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King will increase its bond-purchase program by 50 billion pounds ($79 billion) to 325 billion pounds, according to 35 of 51 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion-pound increase, and one no change.

The economy may shrink 0.2 percent in the first three months of 2012 after contracting in the fourth quarter, the National Institute for Economic and Social Research said yesterday. Malcolm Barr at JPMorgan Chase & Co. was among economists who cut their forecasts for an asset-purchase increase next week after an index of U.K. services growth rose to a 10-month high in January.

“Though big headwinds remain, the U.K. looks set for a proper expansionary phase,” said Philip Rush, an economist at Nomura in London who forecasts a 50 billion-pound increase. “With some of the pressure from big downside risks being removed, that alleviates some of the pressure for them to do 75 billion pounds.”

Policy makers will also hold their benchmark interest rate at 0.5 percent, according to all 57 economists in a separate poll. The bank will announce its decision at noon on Feb. 9 in London and will vote in light of new economic forecasts to be published the following week.

‘Downside’ Risks

Niesr cut its forecasts for U.K. growth yesterday and Simon Kirby, a senior research fellow at the London-based group, warned of “downside” risks without “decisive action” in the euro area. Niesr forecasts the economy will shrink 0.1 percent this year and grow 2.3 percent in 2013, compared with previous projections in October for growth of 0.8 percent and 2.6 percent respectively.

A Greek rescue plan may be wrapped up in coming days, say creditors and European officials. Still, German Finance Minister Wolfgang Schaeuble said that “we can’t pay into a bottomless pit.”

An index of U.K. services purchasing managers rose to a 10- month high of 56 in January from 54 the previous month as new orders increased and business confidence improved, Markit Economics and the Chartered Institute of Purchasing and Supply said yesterday. The groups’ gauge of manufacturing also showed faster growth.

After the services report Deutsche Bank’s George Buckley and Morgan Stanley’s Jonathan Ashworth said the bank would raise its bond plan by 50 billion pounds next week instead of the 75 billion pounds previously forecast.

‘Slightly More Optimistic’

Central bank policy maker Adam Posen said Feb. 2 that while there was still a case for the bank to add stimulus, he was “slightly more optimistic” than a few months ago. He said “there’s a case” for raising bond purchases by 75 billion pounds.

“It is a close call, but we expect the MPC will do another 75 billion pounds,” Michael Saunders, an economist at Citigroup Inc. in London, said in a research note. “The MPC, in preparing updated economic forecasts for the February meeting, will judge that the economy’s growth prospects are worse than they thought in November.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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