Former Bank of England policy maker Kate Barker said the pound’s performance in the coming months will be “quite critical” as the bank decides whether to further expand its bond-purchase program.
The bank raised its target for bond purchases yesterday by 75 billion pounds ($116 billion) to 275 billion pounds to support Britain’s recovery amid the euro area’s debt crisis. Governor Mervyn King said the pound’s decline after the announcement “clearly shows the policy is working.”
“What happens to sterling will depend on what happens in the euro area, the two things are linked,” Barker said in a phone interview yesterday. “If the euro area starts getting over its difficulties, potentially sterling could start to weaken a little bit, and that would be a different background” for policy makers when they take their next decision.
Economists including Michael Saunders at Citigroup Inc. and Philip Rush at Nomura International Plc have said risks to Britain’s growth prospects from the turmoil in Europe make it likely policy makers will expand the bond plan in February.
Barker said a recovery in Europe may weaken the pound while improving Britain’s export outlook. That could stoke inflation and growth, reducing the need for bond purchases to be expanded beyond yesterday’s announcement.
The pound has fallen about 25 percent on a trade-weighted basis since the start of 2007 and a further decline could fuel import price pressures. Policy makers have said the slide has both supported Britain’s recovery by fueling demand for exports, and squeezed consumers by stoking faster inflation.
The pound rose 0.5 percent against the dollar and traded at $1.5516 as of 10:03 a.m. in London. It rose against the euro, trading at 86.56 pence.
“Though the bank has been pretty happy about seeing sterling a bit weaker, it’s not clear to me that weaker sterling would do a lot more for growth at this stage, whereas it might be difficult for inflation,” Barker said.