BOE Holds QE as King Assesses Expanded Toolkit

Bank of England Governor Mervyn King
Mervyn King, governor of the Bank of England. Photographer: Simon Dawson/Bloomberg

The Bank of England maintained its current bond-buying program as policy makers wait to assess the outlook for the latest stimulus and their new lending program to end the recession.

The nine-member Monetary Policy Committee led by Mervyn King held the quantitative-easing target at 375 billion pounds ($585 billion) today, as forecast by all but one of 40 economists in a Bloomberg News survey. It also held the key rate at a record-low 0.5 percent. Today’s decision was made with new economic projections that will be published next week.

The bank started its Funding for Lending program yesterday, designed to boost the flow of credit by rewarding lenders with cheap funds, a month after it expanded bond purchases to battle a double-dip recession. The Federal Reserve yesterday moved a step closer to pumping more stimulus into the world’s largest economy and European Central Bank President Mario Draghi may announce today a plan to tackle the debt crisis that’s hurting global growth.

“We’re looking for a cut in growth forecasts as there are few signs anywhere of a recovery,” said Victoria Clarke, an economist at Investec Securities in London. “The FLS will be important in shaping decisions on the amount of more QE to come, but the bank will, in light of the weak economic backdrop, back more asset purchases.”

Clarke sees the Bank of England expanding QE by 50 billion pounds in November, as do economists at Morgan Stanley and Barclays Plc.

Draghi Pledge

The pound advanced against the dollar after the decision. It traded at $1.5570 as of 12:46 p.m. in London, up 0.2 percent on the day. Gilts stayed higher, with the 10-year yield down 2 basis points at 1.49 percent.

In the euro area, investors will be looking to Draghi to make good on his promise to do “whatever it takes” to protect the single currency, which has been widely interpreted as a signal that the institution will intervene in bond markets.

The ECB kept its benchmark interest rate at a record-low 0.75 percent today and Draghi holds a press conference at 2:30 p.m in Frankfurt.

The U.S. Federal Reserve said late yesterday it will ease policy further if necessary. The Federal Open Market Committee “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” it said after a meeting in Washington. “Economic activity decelerated somewhat over the first half of this year.”

U.K. Recession

The Bank of England’s decision came a week after data showed the economy shrank 0.7 percent in the three months through June, a third straight quarterly contraction. The recession is the U.K.’s first double dip since the 1970s.

Factory output shrank the most in more than three years in July, according to a Markit Economics report yesterday. While a survey today showed construction unexpectedly expanded in July, Markit said the recovery in building is likely to be modest. A services gauge due to be published tomorrow probably rose to 51.6 in July from 51.3 in June, according to a survey of 29 economists in a Bloomberg poll.

In the U.S., data today are expected to show first-time claims for unemployment benefits rose to 370,000 in the week ended July 28, according to the median estimate of 46 economists polled. Producer prices in the euro area fell 0.5 percent in June from the previous month, while the annual rate of inflation slowed to 1.8 percent.

Elsewhere, Australian retail sales rose 1 percent in June, matching the biggest advance since April 2011, fueled by A$2 billion ($2.1 billion) in government carbon rebates and benefit checks paid out since May and interest rate cuts.

BOE Rate

The Bank of England’s key rate has been at a record low since March 2009, and policy makers said last month they may review the merits of another cut once they assess the impact of the FLS. Today’s announcement was forecast by all 53 economists in a Bloomberg survey. Minutes of the decision will be published on Aug. 15.

The meeting was the last for Adam Posen, who pushed for more QE for a year before the MPC finally restarted bond purchases in October 2011. He will be replaced by Ian McCafferty from the Confederation of British Industry next month.

In addition to the euro-area crisis, the U.K. central bank has been battling the impact on the economy of the government’s fiscal squeeze. Chancellor of the Exchequer George Osborne has pledged to maintain his planned cuts, which he says have protected the country’s top credit rating. The yield on the 10-year gilt fell to a record low of 1.407 percent on July 23.

U.K. Outlook Cut

The central bank will publish its new projections on Aug. 8, when King will also hold a press conference. In May, it forecast average annual growth of about 1.2 percent in the fourth quarter of 2012 and 2.3 percent in the fourth quarter of 2013. It predicted inflation at 2.9 percent and 1.7 percent. Consumer-price growth slowed to 2.4 percent in June.

Morgan Stanley cut its U.K. outlook yesterday and now sees the economy shrinking 0.5 percent this year. Economists Melanie Baker and Jonathan Ashworth also forecast that the Bank of England will cut its key rate in November and expand QE by 50 billion pounds that month.

November is seen as the most likely month for any further expansion of stimulus as the 50 billion pounds of QE announced in July will be completed that month. By then, the MPC will also have had time to assess the initial impact of the FLS, which allows banks to borrow treasury bills from the central bank to fund lending to companies and households.

While today’s decision “isn’t a surprise, there is a question mark as to whether current policy settings are appropriate,” said David Tinsley, an economist at BNP Paribas in London. “It is probably not the sort of environment where policy makers want to be doing too little and so Governor King will have to emphasize the likelihood of further easing at next week’s press conference.”

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