King Seen Facing Third BOE Loss as Inflation Concerns Remain
Bank of England Governor Mervyn King risks facing a third defeat in his bid to expand stimulus as officials wary of dislocating inflation expectations set aside new freedoms given by a change to their remit.
The nine-member Monetary Policy Committee led by King will hold its target for asset purchases at 375 billion pounds ($568 billion) today, according to 34 of 37 economists in a Bloomberg News survey. King and two colleagues were outvoted in February and March in a push for a 25 billion-pound increase.
Today’s meeting is the first since Chancellor of the Exchequer George Osborne expanded the MPC’s flexibility, broadening its capacity to ease policy even with above-target inflation. The change, three months before the arrival of new Governor Mark Carney, may not be enough to push through more stimulus after the MPC majority raised concerns that it could be interpreted as a loss of focus, unhinging confidence in their inflation commitment and driving the pound lower.
“They have clearly been concerned about the speed of the pound’s decline and the impact on inflation,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London and a former BOE official. “While it’s important the MPC doesn’t just sit on its hands until Carney comes, the basic story is that the output gap is still wide, but inflation remains a problem.”
The MPC will also leave its benchmark interest rate at a record low of 0.5 percent, where it has been since March 2009, according to a separate survey of economists. The BOE will announce the decisions at noon in London.
Earlier today, the Bank of Japan (8301) expanded its stimulus program in its first policy decision under new governor Haruhiko Kuroda. It announced it would double monthly bond purchases in a bid to reach 2 percent inflation in two years.
In Frankfurt, the European Central Bank will keep its benchmark rate at a record low 0.75 percent, according to the median of 56 estimates in a survey. Just two of the economists polled forecast a cut this time. That decision is due 45 minutes after the BOE announcement.
While two reports this week showed U.K. manufacturing and construction shrank in March, services, the largest part of the economy, continued to grow. Markit Economics and the Chartered Institute of Purchasing Supply said today that their index of services rose to 52.4, the highest in seven months.
Based on the three measures, Markit estimates the economy grew 0.1 percent in the first quarter, which would mean it avoided a triple-dip recession.
Today’s report “is consistent with a relatively robust increase in first-quarter services activity and it could help GDP to remain afloat,” said Annalisa Piazza, an analyst at Newedge Group in London.
The British Chambers of Commerce said this week that the economy probably didn’t shrink in the first quarter and the pound’s decline will help boost exports. Its gauges of domestic and foreign demand at manufacturers and services companies all rose last quarter, with the export measures close to a record.
“The economy is not weak enough to make a convincing argument in favor of QE,” said George Buckley, an economist at Deutsche Bank AG in London. “Voting for 25 billion extra is quite an uncertain decision. Were the data to change and it looked like things wouldn’t recover, you would see more MPC members join King’s side.”
Osborne announced on March 20 that he will give the MPC more leeway to meet its 2 percent inflation target amid strains in the economy. He also asked the BOE assess the benefits of forward guidance.
U.K. inflation accelerated to 2.8 percent in February, and the BOE forecasts a further increase in the coming months. The British Retail Consortium said its inflation measure rose in March and that there was upward pressure on import prices from the pound’s weakness.
Sterling is the second-worst performer this year among 10 developed-market currencies, according to Bloomberg Correlation- Weighted Indexes. It fell 0.4 percent to $1.5074 as of 10:01 a.m. in London.
The pound and its impact on inflation appeared prominently in the minutes of the MPC’s March meeting. The majority against more stimulus said such a move might lead to an “unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.”
King said last month that more stimulus through asset purchases would help foster a nascent recovery and that turmoil in the euro area had hurt confidence. Compass Group Plc (CPG), the world’s largest catering group, said economic conditions across Europe “remain difficult.”
“King’s intellectual leadership is waning a little as he nears the end of his term, as it’s unusual for him not to be followed fairly quickly by the rest of the MPC,” said Vicky Redwood, an economist at Capital Economics Ltd. in London who formerly worked at the BOE. “The data are not quite bad enough to prompt the hawks to change their mind. At the moment it’s a bit of a stalemate.”
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