BOE Halts Bond Purchases as Officials Focus on Lending: Economy

BOE Halts U.K. Stimulus After Officials Question QE Potency
Today’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. Photographer: Matthew Lloyd/Bloomberg

The Bank of England halted expansion of its bond-buying program as officials shifted focus to stimulating bank lending to support a recovery that remains lackluster.

The nine-member Monetary Policy Committee led by Governor Mervyn King said that it doesn’t plan to buy any more bonds beyond the 375 billion pounds ($600 billion) already purchased, concluding a third round of quantitative easing. The decision was forecast by 35 of 45 economists in a Bloomberg News survey. The rest predicted an increase of as much as 50 billion pounds.

Today’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. Increased inflationary pressures may also have prompted policy makers to hold fire even as surveys point to renewed weakness after the U.K. economy surged 1 percent in the third quarter.

“The outlook for the U.K. economy is still uncertain,” Roger Bootle, founder of Capital Economics Ltd. and a former U.K. Treasury adviser, said in an interview on Bloomberg Television’s “City Central” in London. “I suspect the fourth quarter is going to be weak, and if that’s the case, the discussion will come back to QE. I think we’re on course for more QE in the new year.”

The Bank of England also kept its benchmark interest rate a record low of 0.5 percent.

The pound erased its decline against the dollar after the announcements and traded at $1.5996 as of 12:45 p.m. in London. U.K. 10-year gilts erased an advance, pushing the yield up 3 basis points to 1.786 percent.

QE Impotence

BOE Deputy Governors Paul Tucker and Charles Bean both suggested in recent speeches that asset purchases may no longer have the same impact on the economy as when first introduced in 2009. At the same time, Martin Weale has questioned whether loosening policy is right with inflation above the central bank’s 2 percent target.

Inflation was at 2.2 percent in September and King said last month that recent energy costs increases mean it will stay above the goal “well into next year.” The MPC had new growth and inflation forecasts at today’s meeting, which it will publish next week. Minutes of the meeting, showing how the committee members voted, will be released on Nov. 21.

ECB Decision

The European Central Bank kept its benchmark rate at a record low of 0.75 percent today, as predicted by all but one of 63 economists in a Bloomberg News survey. President Mario Draghi will hold a press conference in Frankfurt at 2:30 p.m.

The European Commission cut its 2013 growth forecast for the euro area to 0.1 percent yesterday and said the region’s turmoil is one of main risks to Britain. The commission also lowered its projection for the U.K. to 0.9 percent from 1.7 percent. U.K. indexes of manufacturing and services declined in October and a measure of retail sales plunged, reports in the past week showed.

At the same time, Prime Minister David Cameron’s government is cutting spending to narrow the budget deficit, adding to pressure on the economy. Marks & Spencer Group Plc, the U.K.’s biggest clothing retailer, said on Nov. 6 that recent trading “has been volatile” and it’s “cautious about the outlook for the rest of this year.”

Serbian Inflation

Elsewhere today, the central banks of Indonesia and Malaysia kept their respective benchmark interest rates unchanged for a ninth straight meeting. In Serbia, policy makers raised their key rate for a fifth time since June to tame inflation after it accelerated above 10 percent. The Narodna Banka Srbije lifted the one-week repurchase rate 0.2 percentage point to 10.95 percent.

Even with QE halted, the Bank of England still has the FLS, which it set up with the U.K. Treasury and is aimed at boosting lending. The program began in August and as of last month, 30 financial institutions had signed up, including Lloyds Banking Group Plc and Barclays Plc.

The British Chambers of Commerce said the central bank was right to halt QE and called for measures to more directly boost credit to companies.

“With yields on gilts at very low levels already, adding to QE would only provide marginal benefits for the real economy, while creating longer-term risks of bubbles,” BCC Chief Economist David Kern said in a statement. “Efforts must be made to ensure that the Funding for Lending Scheme works more effectively.”

The MPC also has the option to restart QE if needed as it awaits euro-area developments and monitors how the U.S. deals with the fiscal cliff, the $607 billion of tax increases and spending cuts set to kick in automatically in January.

“Although our baseline view is that growth and inflation outturns will be sufficient to dissuade the MPC from providing further stimulus, it is far too early to say that QE has run its course,” said Simon Hayes, an economist at Barclays in London. If the surge in third-quarter economic growth turns out to be a “false dawn, QE will be back on the agenda.”

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