BOE Drops Reference to Rate Cut as It Considers Policy Options

A Pedestrian Passes The Bank of England
Bank of England policy makers voted unanimously to keep their bond-purchase target unchanged this month and said they will assess the need for other measures in light of the impact of its credit-boosting program. Photographer: Simon Dawson/Bloomberg

Bank of England policy makers dropped a reference to interest-rate cuts this month as they voted to keep their bond-purchase target unchanged and said they will assess the need for other stimulus measures.

The Monetary Policy Committee voted 9-0 to hold the target at 375 billion pounds ($587 billion), according to the minutes of the Aug. 1-2 meeting, published in London today. It also voted 9-0 to keep the benchmark interest rate at a record-low 0.5 percent.

“Over the coming months, the committee could take stock of the impact of the Funding for Lending Scheme and the implications this had for other potential policy options,” it said, without mentioning rates. While for some members this month’s decision was “relatively straightforward,” others saw a “good case” for more asset purchases, it said.

The central bank said last month it may review the merits of a reduction in borrowing costs once it assessed the impact of the FLS, which is aimed at boosting credit to companies and households. Investors increased bets on a cut after the comments before Governor Mervyn King lowered expectations, saying on Aug. 8 that it may do more harm than good at present because of damage to some banks’ margins.

“Interestingly, there was no discussion of an interest-rate cut that some analysts have called for,” said James Knightley, an economist at ING Bank in London. “We have long doubted that such action would happen given the” central bank’s concern “about what it would mean for interest margins and bank lending.”

Sonia forward contracts show that a rate cut isn’t priced in through July next year, according to data from Tullett Prebon Plc. Earlier this month, traders were betting on a reduction as soon as this October.

BOE Forecasts

The central bank cut its growth forecasts last week and said the outlook is “unusually uncertain.” It sees the economy shrinking about 0.2 percent this year, according to Bloomberg calculations based on data published by the central bank today.

In the minutes, it said that some of the 0.7 percent drop in second-quarter gross domestic product was due to one-time factors and may be partially recovered in the current quarter. It also said that there were “reasons to believe” that demand growth would begin to pick up, citing cooling inflation and the potential impact of the FLS. Still, it added that the “disappointing pace of recovery” was likely to continue.

The MPC also said that it expects inflation will continue to ease, though it noted the risk of “external price shocks.”

Lending Program

On the FLS, which is aimed at boosting credit to companies and households, the Bank of England said it was “encouraging that a number of banks had decided to cut rates on some mortgages and small-business loans.”

“Indeed, it was possible that the impact” might be “somewhat greater than the relatively cautious assumptions” in the central bank’s Inflation Report, it said.

“Set against that, other factors restraining demand were likely to remain in force or could even worsen,” the bank said. “The global economy had continued to slow and very substantial risks remained in the euro area.”

The central bank also noted risks to the effectiveness of the FLS and its bond-purchase program “if uncertainty and risk aversion among households and businesses were the dominant factors holding back spending in the current environment.”

The Bank of England expanded its bond-purchase program by 50 billion pounds in July in a decision that had two dissenters, Chief Economist Spencer Dale and Ben Broadbent.

“For those members who had voted against the expansion of the programme at the previous meeting, there were potentially costs to reversing the previous month’s decision,” the central bank said in today’s minutes.

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