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King May Oversee ‘Uneasy Truce’ as BOE Stays Split

Mervyn King, governor of the Bank of England
Mervyn King, governor of the Bank of England. Photographer: Chris Ratcliife/Bloomberg

Bank of England Governor Mervyn King may oversee another stalemate today as faster inflation and conflicting economic signals entrench a three-way split on his Monetary Policy Committee over the need for more stimulus.

The nine-member panel will probably keep the size of its bond-purchase plan at 200 billion pounds ($314 billion), according to all of the 34 economists in a Bloomberg News survey. All 58 economists in a separate poll predicted the benchmark interest rate will stay at 0.5 percent. The bank announces the outcome of its meeting at noon today in London.

Bank of England officials are considering whether Britain faces a greater danger from inflation or from the deepest budget cuts since World War II and Europe’s debt crisis. Policy maker Andrew Sentance voted last month to withdraw stimulus, while Adam Posen argued the economic recovery needs more aid, and the rest opted for no change.

“They’re going to sit in an uneasy truce,” Michael Saunders, chief western European economist at Citigroup Inc. in London, said in a telephone interview. “Even though things are going to slow down, that won’t be enough to tip their hand for more stimulus. The next move will be a gradual tightening, starting in late 2011.”

The pound was little changed against the dollar today, trading at $1.5802 as of 8:47 a.m. in London. The yield on the 10-year U.K. government bond slipped 3 basis points to 3.519 percent.

Inflation Hindrance

Central banks elsewhere are guarding against a relapse in growth. Federal Reserve Chairman Ben S. Bernanke said on Dec. 6 that he may expand bond purchases beyond the $600 billion announced last month as the U.S. economy barely expands at a sustainable pace. The European Central Bank delayed the end of emergency stimulus last week and stepped up government-debt purchases to soothe “acute” market tensions.

The strength of U.K. inflation has dissuaded officials from adding stimulus. Consumer prices rose an annual 3.2 percent in October, exceeding the government’s 3 percent upper limit. Inflation expectations reached a 26-month high in November, according to a YouGov Plc survey for Citigroup.

“The inflation data are presenting a bit of a hurdle to any further policy stimulus, but at the same time the first half of next year is going to be quite tricky from a growth perspective,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “Those things combined give us maybe six months of policy inertia.”

Mixed Data

Chancellor of the Exchequer George Osborne said yesterday that Britain’s recovery is “on track” after the economy posted its strongest two consecutive quarters of growth in a decade this year.

Recent data have painted a mixed picture. Surveys showed manufacturing growth accelerated to the fastest pace in 16 years in November and services expansion stayed close to a four-month high. A construction index still remained near the weakest in eight months, and Lloyds Banking Group Plc’s mortgage-lending Halifax unit said today that house prices dipped 0.1 percent in November as demand weakened.

Homebuilder Bellway Plc said Dec. 7 that its pretax profit will rise as it weathers a “tough and testing” market.


The Treasury’s fiscal watchdog cut its economic growth forecast for 2011 last week and said the U.K. faces a “sluggish” recovery. The Office for Budget Responsibility forecasts that about 330,000 government jobs will be axed by 2015, 160,000 fewer than thought in June, and the loss will be more than offset by the creation of about 1.5 million private-sector jobs.

“Although the recovery has been pretty good up until now, I don’t think that necessarily means that the economy is in a good position to withstand the government spending cuts and tax rises next year,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former Bank of England official. “The question is whether the rest of the economy can offset the effects of the fiscal squeeze and we don’t think it can.”

Officials are counting on exports to aid economic growth as the budget squeeze hurts consumers. While manufacturing production rose 0.6 percent in October, twice as much as economists forecast, overseas sales are still vulnerable to events in the euro area and King said last month that the biggest risk facing the economy was from international factors.


King also indicated that the rate-setting panel is adopting a neutral stance. The risks to getting inflation back to target are “broadly balanced” and policy makers “stand ready to adjust policy in either direction should the outlook for inflation demand it,” he told lawmakers on Nov. 25.

“The majority of the MPC have effectively positioned themselves to maintain a very expansionary monetary policy stance,” said Jens Larsen, London-based chief European economist at RBC Capital Markets and a former Bank of England official. “If we continue to have reasonable growth and inflation coming up as strongly as currently expected, then the November 2011 Inflation Report is the point at which the MPC will start thinking about a tightening of policy.”

In the meantime, the balance of risks remains tipped toward policy makers increasing stimulus because of spare capacity in the economy and the uncertainty of the international environment, RBS’s Walker said.

“If the bigger global picture is still that there are major financial strains and contagion risks in the euro area, then the big global risk is going to be tilted towards deflation rather than inflation,” he said. “In that environment, the Bank of England has plenty of leeway.”

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