BOE Says More Stimulus on Agenda After Posen Proposes ‘Plan B’

BOE Governor Mervyn King
The Monetary Policy Committee, led by Governor Mervyn King, seen here, voted 8-1 to keep the benchmark interest rate at 0.5 percent. Photographer: Paul Thomas/Bloomberg

The Bank of England signaled that it’s moving closer to more asset purchases, joining the Federal Reserve in contemplating further stimulus to revive a flagging economic recovery.

That may put both the expansion of the central bank’s 200 billion-pound ($313 billion) government-bond holdings and buying other securities on U.K. officials’ agenda. Policy maker Adam Posen said last week that a “plan B” approach for the Bank of England should be “heavy-duty credit easing.”

Some Bank of England policy makers said that the chances of stimulus being needed have increased, in minutes of their Sept. 9 decision released today after the Confederation of British Industry cut its gross domestic product forecast for next year. The Fed said yesterday it’s willing to ease monetary policy further to spur economic growth and support prices.

“The impact on money-supply growth and real economic activity has been pretty subdued” given the scale of the Bank of England’s bond buying, Neil Mackinnon, an economist at VTB Capital in London and a former U.K. Treasury official, said in a telephone interview. “What Posen is recommending is that the BOE take a leaf out of the Fed’s book” with wider purchases than government bonds. His “idea has some merit,” he said.

Mackinnon said that the central bank could consider large-scale purchases of securities such as mortgage-backed securities and commercial paper. The minutes didn’t specify what further measures may be considered.

The yield on the U.K. 10-year government bond plunged 15 basis points today to 2.963 percent. The pound, which fell as much as 0.4 percent after the minutes, traded at at $1.5619 at 13:57 p.m. in London.

MPC Decision

The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan unchanged. For some officials, “the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased,” the minutes said.

Posen said on Sept. 16 the bank’s plan in case the economy falters should be to start buying private assets to intervene in specific markets.

“Because we have only done quantitative easing up till now, our plan B or our next page in my opinion, and I’ve said this, is to shift into heavy-duty credit easing,” he said.

Analysts at the National Institute of Economic and Social Research, whose director is Bank of England official Martin Weale, said in a paper published in February that the Fed has given more help to the economy than the Bank of England because U.S. officials made greater use of so-called credit easing tools.

Fed Ahead

“The Bank of England has eschewed credit easing and hence has done significantly less than the Federal Reserve to mitigate the effects of the financial crisis,” Niesr economists Ray Barrell and Dawn Holland wrote. “A lack of willingness to use credit easing in the U.K. to reduce borrowing costs faced by firms has probably meant that the output gap has been 1 percentage point larger than it could have been.”

Danny Gabay, a former Bank of England economist and director of Fathom Financial Consulting in London, said that the Bank of England could consider a range of measures such as buying bank shares and mortgage-backed securities, and adding to their corporate-bond purchases. He has previously proposed purchases of homes on the verge of repossession.

More Needed

“Doing more of the same isn’t necessarily the right thing,” he said in a telephone interview. “It’s a secondary question which assets they buy. The intellectual point is that they needed to do more to stimulate the economy.”

Bank of England officials said in July that the bond-purchase program has aided growth by shaving 1 percentage point off government bond yields. The bank still said this week that M4, the broadest measure of money supply, rose an annual 1.8 percent in August, the least since records began in 1983.

Data in the past month have signaled a “reduction in growth prospects” for the second half of the year, the minutes said. The CBI, Britain’s biggest business lobby, cut its growth forecast for next year to 2 percent from a projection of 2.5 percent in June because of the government budget squeeze.

Some Bank of England officials said that recent data “indicated that the headwinds to a recovery in private-sector demand in the U.K. and overseas were somewhat stronger than previously thought and that the downside risks to activity had increased.” One unspecified policy maker said that the risk of “an adverse hit to the supply capacity of the economy had increased in recent months.”

Andrew Sentance pushed for a fourth month to raise the interest rate “gradually.” “Most” officials see the bank’s current stance as “appropriate,” according to the minutes.

“It certainly seems that the MPC is edging closer towards doing more quantitative easing and perhaps out of all the central banks is getting closest in providing additional stimulus to the economy,” said Samuel Tombs, U.K. economist at Capital Economics Ltd. in London, in a telephone interview. Tombs said the Bank of England may buy an extra 50 billion pounds in government bonds “at the start of next year.”

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