Bank of England policy maker Adam Posen’s signal that he may need to double his call for bond purchases will intensify the debate at the U.K. central bank for more stimulus as the economy falters.
Posen said yesterday the central bank may need to buy as much as 100 billion pounds ($158 billion) in securities within three months and warned that officials’ delay in acting has made economic prospects “worse.” He has voted since October for a 50 billion-pound increase in the bond plan.
Posen’s attempt to convince his colleagues on the Monetary Policy Committee that they are damaging the economy by doing nothing comes as central banks from the Federal Reserve to the Swiss National Bank seek new ways to bolster their recoveries. He has been the sole voice on the MPC voting for more so-called quantitative easing, and minutes of this month’s meeting on Sept. 21 will show if anyone else joined him.
“It wouldn’t take much to convince a few others,” Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and a former central bank official, said by phone. “We may see one more joining.”
The central bank bought 200 billion pounds of bonds in a program that ended in early 2010. Posen’s comments may point to a further shift in the MPC just two months after Spencer Dale and Martin Weale abandoned a push for higher interest rates to control inflation that accelerated to 4.5 percent in August. While that’s more than twice the bank’s goal, it has set its key rate at a record-low 0.5 percent since March 2009.
“Central bank officials have wasted too much time over the last year worrying about how their institutions would appear,” Posen said in a speech in Wotton-under-Edge, western England. “Sometimes you have to do the right thing even if it may be misperceived.”
The pound was little changed against the dollar today, and traded at $1.5787 as of 11:07 a.m. in London It’s dropped about 4.5 percent since Aug. 17, when minutes of last month’s meeting showed some officials discussed the need for more stimulus.
The National Institute of Economic and Social Research said last week economic growth slowed to 0.2 percent in the three months through August. Claims for jobless benefits rose 20,300 last month, while the ILO unemployment rate held at 7.9 percent in the three months through July, the Office for National Statistics said today in London.
“The run of news on the U.K. and the global economy has been worse than expected,” Philip Shaw, chief economist at Investec Securities in London, said by phone. “We wouldn’t be surprised if the MPC signaled a return to QE next month.”
Goldman Sachs Group Inc. and BNP Paribas SA forecast the Bank of England will restart asset purchases within months as the outlook deteriorates. Posen, 44, said all central banks in the Group of Seven nations should be expanding stimulus.
“If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage,” Posen said. It’s the “right thing to do right now.”
He also said there is “still room to bring down the longer end of the yield curve,” echoing Weale, who said on Aug. 25 that while short-dated debt yields are at record lows, that’s not the case at the “longer end of the market.”
U.K. 10-year yields were at 2.41 percent late yesterday in London. They dropped to 2.18 percent on Sept. 12, the lowest since at least January 1989, when Bloomberg started collecting the data.
The central bank may need to consider the side effects of any purchases of longer-dated government debt because it could cause disruptions for investors such as pension funds.
“If the bank is buying more gilts you wind up reducing liquidity in the market, so there are financial stability consequences of them holding too much,” Barwell said. “If they did more QE, they’d have to stop buying gilts at some point, so the question is where else they would go.”
Barwell also said Bank of England Governor Mervyn King may have joined the call for more QE. King said in May that he agreed “qualitatively” with Posen. BNP economist David Tinsley pointed to markets director Paul Fisher, who described the bond program as “very much on the table” in June, as a possible QE supporter.
A year ago, Posen called on his colleagues to prepare a “Plan B” for “large-scale non-gilt asset purchases.” Yesterday, he said the U.K. government should consider creating a new lender to small- and medium-sized businesses, with help from the central bank.
Simon Maughan, head of sales and distribution at MF Global Ltd. in London, said while such a lender “sounds credible,” it would take about a year to establish.
Posen’s proposal comes as the government considers how to implement a recommendation from the Independent Commission on Banking that lenders insulate their consumer-banking units from investment divisions by 2019. The ICB also proposed that banks protected by such firewalls hold more capital than required by the Basel Committee on Banking Supervision.
“This week brings out a degree of tension in the regulatory environment by requiring ringfencing and more capital along with a push for more lending,” Tinsley said. “That tension will continue to play out over the next five to 10 years.”