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BOE May Mull More Stimulus as Slowdown Threatens Recovery

Pedestrians pass the Bank of England in London. Photographer: Simon Dawson/Bloomberg
Pedestrians pass the Bank of England in London. Photographer: Simon Dawson/Bloomberg

Sept. 8 (Bloomberg) -- Bank of England policy makers may consider the need for more stimulus today in case global market strains worsen, setting aside inflation risks as the recovery threatens to unravel.

With European governments struggling to counter the region’s debt crisis, the Federal Reserve mulling additional stimulus measures and global growth cooling, the bank may keep its benchmark interest rate at a record low, according to all 57 economists in a Bloomberg News survey. While a separate poll shows the central bank will keep its bond plan unchanged, Goldman Sachs Group Inc. and Citigroup Inc. say policy makers will resume asset purchases by November.

The FTSE-100 has dropped 8.3 percent since the start of August, just before Governor Mervyn King chaired the last Monetary Policy Committee meeting. For now, a 4.4 percent inflation rate may stay its hand, even after surveys showed manufacturing contracted in August and services growth slowed as the budget squeeze persisted.

“We don’t expect them to do more quantitative easing, but they’ll discuss the conditions required to justify a move later in the year,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “The recovery has run into the sand but it’s not clear the economy is contracting.”

Vote Switch

The Bank of England will announce the decision at noon in London. The bank bought 200 billion pounds ($320 billion) of securities in a program that ended in early 2010, as the economy emerged from recession. While Adam Posen has been the only policy maker to vote for further purchases, the darkening economic outlook prompted Spencer Dale and Martin Weale to end their push last month for an interest-rate increase.

The pound fell 0.3 percent against the dollar and was trading at $1.5938 as of 8:08 a.m. in London. Bonds rose, with the yield on the 10-year government gilt dropping 2 basis points to 2.32 percent.

All 57 economists in a survey expect the Bank of England to keep its key interest rate on hold at a record-low 0.5 percent today. The bank will also leave the bond plan unchanged, said all but one of 41 economists in another poll. The European Central Bank, which announces its policy decision 45 minutes later in Frankfurt, will also leave its benchmark on hold, according to a separate survey.

Downside Risks

Minutes of the MPC’s August meeting showed some members said increasing the bond plan might “become warranted” if downside risks materialize.

Since then, the cost of insuring U.K. bank bonds for five years has risen to levels last seen in September 2008, when Lehman Brothers Holdings Inc. collapsed. Consumer confidence fell for a third month and an index of services dropped the most in a decade in August. Yields on the debt of Portugal, Italy, Greece and Spain have soared on concern Europe’s leaders will fail to solve the debt crisis.

“The argument for raising rates is well off the agenda,” said David Tinsley, an economist at BNP Paribas SA in London and former Bank of England official. “There will be more QE by November, and if the data continues worsening we could easily get it in October.”

The Institute of Directors, a London-based business lobby, today called for a 50 billion-pound increase in the bond program, while the British Chambers of Commerce sees “arguments” for an immediate expansion.


The central bank may be reluctant to start a new round of purchases while inflation is above its 2 percent target and the economy is still growing. King has said price growth will quicken to 5 percent in the coming months before easing, which compares with an inflation rate of 2.9 percent when the bank started QE in March 2009.

“It’s quite difficult to justify more monetary support when inflation is so far above target,” said Samuel Tombs, an economist at Capital Economics in London. “The risk is that it becomes ingrained with higher inflation expectations.”

Another barrier stems from questions on what further stimulus would achieve. So far the bank has acquired about 198 billion pounds of gilts, with the rest in corporate bonds and commercial paper. More than half the gilts are due in five to 25 years, according to Morgan Stanley.

The yield on 10-year government bonds was at 2.34 percent yesterday, after falling to record-low 2.24 percent last month.

“It won’t make much difference,” said Brian Hilliard, an economist at Societe Generale in London. “One of the prime effects they’ve been looking for is on yields, and their own studies showed QE reduced them by 1 percentage point. I can’t see that happening when we have almost record-low yields now.”

Fed Meeting

Other central banks are also grappling with boosting stimulus. The Federal Reserve will consider at its next meeting on Sept. 20-21 replacing short-term Treasury securities with long-term bonds to lower borrowing rates, and some economists are calling on the ECB to cut interest rates.

Any revival of QE by the Bank of England would require the assent of the Chancellor of the Exchequer George Osborne. He said Sept. 6 he’ll stick to his budget cuts, leaving the onus for stimulating the economy on the central bank.

While that remark may raise pressure on the bank to act, policy makers will likely keep their own counsel, Tinsley said. Osborne’s predecessor, Alistair Darling, described King as “incredibly stubborn” in memoirs published this week.

“The chancellor is signalling that when the request comes, there’ll be no obstacles,” Tinsley said. “As we know from Darling’s comments, the governor is not a man to be pushed around.”

To contact the reporter on this story: Jennifer Ryan in London at

To contact the editor responsible for this story: Craig Stirling at

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