BOE Halts Stimulus as Inflation Threat Outweighs Slump
Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that’s succumbed to a double-dip recession.
The nine-member Monetary Policy Committee led by Governor Mervyn King today held its quantitative-easing target at 325 billion pounds ($525 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left the benchmark interest rate at a record low of 0.5 percent. The pound erased its decline against the dollar.
With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Today’s decision signals price-growth worries are mounting even as the U.K. struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.
“They’re trying to signal a transition away from a mild dovish bias toward a more normal stance,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “Our forecast is that they’re done with QE, but you can’t rule out more later this year. They could get blown off course if market conditions deteriorate.”
The pound rose as much as 0.4 percent against the dollar after the announcement, erasing its loss on the day. It traded at $1.6169 as of 12:41 p.m. in London.
Government bonds declined, pushing the yield on the 10-year gilt up 7 basis points to 1.970 percent. The yield fell to a record-low 1.881 percent yesterday as Europe’s debt crisis pushed investors to seek refuge in the relative safety of U.K. sovereign debt.
Unlike the last time the bank halted quantitative easing in February 2010, the central bank didn’t issue a statement today. King is due to speak at a press conference on May 16, when the bank will publish the new economic forecasts that underpinned today’s decision. Minutes of the meeting, showing how policy makers voted, will be released on May 23.
“Keen to defend today’s decision, the message is probably going to be that the risks around the inflation target are now balanced,” said Philip Rush, an economist at Nomura International Plc in London. “That would mean the MPC has no current bias to changing policy, but of course does not pre- commit it to do nothing.”
Elsewhere, Russia’s central bank refrained from cutting interest rates for a fifth month today, signaling determination to hold down price growth. The European Central Bank said today that professional forecasters raised their estimates for inflation this year and next. Forecasters estimate euro-area inflation will average 2.3 percent and 1.8 percent, up from 1.9 percent and 1.7 percent three months ago respectively.
In the U.K., consumer-price growth accelerated to 3.5 percent in March and inflation concerns are mounting.
Deputy Governor Paul Tucker said April 18 that the “uncomfortably above target” rate could hold above 3 percent into the second half of the year. Policy maker Adam Posen ended a push for further stimulus last month and minutes of that meeting said there was a risk that inflation may “fall less rapidly” than projected.
Still, the Confederation of British Industry, the U.K.’s biggest business lobby, said a third round of QE can’t be ruled out, citing “subdued” economic conditions and signs that euro- area tensions are building again.
Reports last week indicated manufacturing and services weakened in April after the economy shrank 0.2 percent in the first quarter. J Sainsbury Plc (SBRY), the U.K.’s third-largest supermarket owner, said yesterday that the “wider economic situation remains uncertain.”
Factory output rose a faster-than-expected 0.9 percent in March from February, when it fell a downwardly revised 1.1 percent, the statistics office said today. Overall industrial production fell 0.3 percent, in line with economists’ forecasts.
In the euro area, Britain’s biggest export market, Spain is struggling to contain speculation it will need a bailout, while a political stalemate in Greece after elections has raised concerns the country may leave the currency bloc. More than 50 percent of investors predict a country will exit this year, according to the Bloomberg Global Poll published today.
The minutes of today’s decision may reveal a split among policy makers. David Miles, the only MPC member to vote for more stimulus last month, has since said in an interview that his decision looks vindicated, while Martin Weale said data showing the U.K. slipped back into recession strengthened the argument for more QE.
“It is possible for the MPC to reopen the tap on asset purchases at any stage, even in principle at least, next month,” said Philip Shaw, an economist at Investec Securities in London. “But more realistically the committee has probably entered a period of ‘wait and see.’”
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