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BOE Unanimous as Bond Buying Pace Approaches Market’s Limit

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BOE KING
Mervyn King, governor of the Bank of England, leaves a news conference at the Bank of England in London, U.K., on Thursday, Dec, 1, 2011. Photographer: Chris Ratcliffe/Bloomberg

Dec. 21 (Bloomberg) -- Bank of England policy makers said the pace of their bond purchases is close to the market’s capacity as some signaled further stimulus might be needed next year to weather Europe’s sovereign debt crisis.

The Monetary Policy Committee, led by Governor Mervyn King, voted unanimously to keep the target for gilt buying at 275 billion pounds ($432 billion) after increasing it by 75 billion pounds in October, according to the minutes of their Dec. 7-8 meeting published today in London. They also voted 9-0 to keep the key interest rate at a record-low 0.5 percent.

“Some members continued to note that the balance to risks to inflation in the November inflation report projections meant that a further expansion of the asset purchase program might well become warranted,” the minutes said. “It was noted that market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way.”

Consumer confidence plunged to the lowest in almost three years this month as unemployment rose and above-target inflation squeezed household budgets, GfK NOP Ltd. said today. Officials have warned the crisis in the euro area may hurt the U.K. economy, as the government refuses to compromise on the pace of its deficit-reduction plan.

Separate data today showed Britain’s budget deficit narrowed more than economists forecast in November as tax revenue increased and the government restrained spending.

The pound rose 0.6 percent against the dollar and traded at $1.5760 as of 10:26 a.m. in London. The yield on the two-year generic gilt was up almost 1 basis point today at 0.38 percent.

Contraction Risk

Data tomorrow will show Britain’s economy grew 0.5 percent in the three months through September, according to the median forecast of 28 economists surveyed by Bloomberg News. Bank of England Chief Economist Spencer Dale said this month there’s a risk the economy may shrink for at least one quarter as the euro area heads toward a recession.

Some officials “thought that the outlook had deteriorated somewhat on the month, and noted the further weakening in the labor market and increased concerns for credit supply arising from the continuing strains in bank funding markets,” the minutes said.

“It seemed likely that a contraction in activity was under way in the euro area” and “the substantial challenges faced by the euro area posed a threat to the outlook” for the U.K., according to the minutes. All officials agreed that there was “little merit” in changing the path of asset purchases at the meeting and that there had been little change in the risks to the U.K. in the previous month.

‘Pipeline’

The minutes signal “more asset purchases are in the pipeline after the current program will be completed in January,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “Indeed, we expect the BOE to keep the printing press running next year. This is based on our view that the economy will slide into a mild recession this quarter and next, before posting a modest recovery.”

King has said there are early signs of a credit crunch in the euro area. The European Central Bank will lend euro-area banks 489 billion euros ($643 billion) for three years, it said today, more than economists had forecast. The move is the ECB’s latest attempt to keep credit flowing to the economy.

Bank of England Deputy Governor Charles Bean said yesterday that the U.K. faces a “difficult” year in 2012, while policy maker Ben Broadbent said there’s a “material chance of a technical recession,” which is two consecutive quarters of contraction. The Office for Budget Responsibility, Britain’s fiscal watchdog, cut its forecasts for economic growth last month to reflect turmoil in Europe.

Britain’s net government borrowing excluding support for banks fell to 18.1 billion pounds in November from 20.4 billion pounds a year earlier, the Office for National Statistics said. Tax revenue rose 7.1 percent, while spending increased 0.8 percent.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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