BOE’s ‘Finely Balanced’ Decision Keeps QE Options Open: Economy

BOE Voted 8-1 on U.K. Stimulus in ‘Finely Balanced’ Decision
Pedestrians pass the Bank of England in London. Photographer: Simon Dawson/Bloomberg

Bank of England policy makers kept open the possibility that they may resume stimulus again, saying a decision to halt bond purchases this month was “finely balanced” because of risks from the euro area.

While just one of the nine-member Monetary Policy Committee voted to add to quantitative easing on May 10, the central bank said in the minutes of the meeting published today that there was a case for injecting more and it could do so if needed. Separately, Deputy Governor Charlie Bean said more bond purchases may be needed if conditions “deteriorate significantly.”

The central bank is keeping the option of more QE alive as a resurgence of the euro-area debt crisis puts the U.K. into what Governor Mervyn King says is “turbulent waters.” European leaders meet today to discuss the turmoil and grapple with a political impasse in Greece that’s raised speculation the nation may leave the 17-nation currency bloc.

“The Bank of England is clearly maintaining an open mind and a flexible approach,” said Howard Archer, chief European economist at IHS Global Insight in London. “Any deterioration in the underlying growth outlook and it will pull the QE trigger again.”

The central bank held its bond-purchase target at 325 billion pounds ($511 billion) this month, with David Miles the only MPC member to push for more. It also kept its benchmark interest rate at a record-low 0.5 percent, a unanimous decision.

Bonds Gain

U.K. government bonds rose today, pushing two-, five- and 10-year yields to record lows. The yield on the 10-year gilt dropped 8 basis points to 1.787 percent and was at 1.79 percent as of 11:38 a.m. London time. The pound slipped 0.2 percent to $1.5724 after touching $1.5680, the weakest since March 15. It was 0.1 percent stronger against the euro at 80.39 pence.

Data today showed U.K. retail sales fell 2.3 percent in April, the most in more than two years, as record rainfall reduced demand for clothing and fuel sales plunged. British manufacturing demand fell to the weakest this year in May and the outlook “deteriorated sharply,” the Confederation of British Industry said separately.

The Bank of England said that for “several members,” the decision not to expand the asset-purchase program at this month’s meeting was “finely balanced.” It said the MPC will “monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it.”

IMF View

The International Monetary Fund said yesterday that the central bank should loosen policy further to aid the U.K. economy, which has slipped into its first double-dip recession since 1975.

“There was a case for injecting further monetary stimulus” this month, the MPC said in the minutes. Risks relating to the euro area “had recently resurfaced and there was a possibility that they would weigh more heavily than expected on business and consumer confidence.”

Policy maker Adam Posen has indicated he may be open to changing his view after ending his call for more QE in April. Posen, who is due to leave the Bank of England in August, has said it may have been “premature” to switch his vote as the U.K. economy might be weaker than he previously thought.

“If conditions do deteriorate significantly, we may need to restart the program of purchases,” Bean said in a speech today in Gloucestershire, western England. “The decision at our May meeting not to extend the program was already quite finely balanced.”

Inflation Outlook

While inflation is likely to remain above the Bank of England’s 2 percent target for longer than previously anticipated, the central bank said it still sees it slowing to below the goal within its forecast period. Inflation eased to 3 percent in April from 3.5 percent in March.

The central published the numerical parameters of its quarterly forecasts today. The projection put policy makers’ central modal forecast for inflation in two years’ time at 1.58 percent, compared with an estimate of 1.78 percent in February.

The central bank also said that economic growth will remain weak in the near term before strengthening. In its report, the CBI said an index of factory orders dropped to minus 17 from minus 8 in April, the lowest since December.

Elsewhere in Europe, data showed Italian consumer confidence plunged to its lowest in more than 15 years in May as government spending cuts deepen a recession.

In Asia, China International Capital Corp. said a Greek exit from the euro could drag China’s economic growth to 6.4 percent this year by weakening global expansion. That would be the least since 1990, according to data compiled by Bloomberg.

Japan reported lower-than-estimated exports and a wider trade deficit for April, underscoring risks to the economy’s recovery a day after Fitch Ratings cut the nation’s debt rating. Exports rose 7.9 percent from a year earlier, less than the 11.8 percent median forecast in a Bloomberg News survey.

In the U.S., a report today may show demand for new homes increased in April as lower prices and mortgage interest rates drew buyers, according to economists. Purchases rose at a 335,000 annual rate, up 2.1 percent from 328,000 in March, according to a Bloomberg survey. The Commerce Department’s report is due at 10 a.m. in Washington.

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