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King Awaits Scrutiny on QE Halt as U.K. Relapse Risk Lingers

Bank of England Governor Mervyn King
Mervyn King, governor of the Bank of England. Photographer: Chris Ratcliffe/Bloomberg

Bank of England Governor Mervyn King is preparing for tough questions on why policy makers halted its bond-purchase program at a time when the economy’s recovery isn’t yet assured.

King will face a hard time explaining why the central bank doesn’t plan to buy more gilts to stimulate growth as Britain tries to shake off a recession, said economists including Jens Larsen at RBC Capital Markets and Rob Wood at Berenberg Bank, both former BOE officials. He will brief journalists on Nov. 14 and testify to lawmakers in the coming weeks.

While Britain’s economy emerged from recession in the third quarter, the recovery remains under threat from the continued crisis in the euro area, the U.K.’s biggest trading partner, and cooling global growth. Against that backdrop, as well as the pressure from the government’s fiscal squeeze, King will have to explain why the MPC pulled the plug on what has been its main policy tool since 2009.

“They are facing a significant communications challenge here,” Larsen said in a telephone interview. “It will be difficult combining what may be a weaker outlook with trying to explain why they chose to halt QE.”

The Monetary Policy Committee said that it doesn’t plan to buy any more bonds beyond the 375 billion pounds ($599 billion) already purchased, concluding a third round of quantitative easing. Economists at Nomura International Plc and Barclays Plc said the move was likely to have split the nine-member MPC. The central bank will publish the minutes of the two-day meeting, showing how the committee voted, on Nov. 21.

Inflation Concerns

The decision followed comments from BOE Deputy Governors Charles Bean and Paul Tucker that QE may not have the same impact as it did when it was introduced in 2009. It also suggests the bank may focus more on credit-boosting measures such as the Funding for Lending Scheme to ignite growth.

At the same time, increased inflationary pressures may also have prompted policy makers to hold fire.

The Bank of England forecast in August that inflation would slow to below its 2 percent target by the end of next year. Recent energy-price increases have boosted the near-term outlook for inflation and the central bank may raise its forecasts next week. Still, Royal Bank of Scotland Group Plc says the projections will still imply a bias toward loosening.

King’s Defense

King will deliver an opening statement and then take questions at the press conference, when the bank will publish its quarterly Inflation Report. He may point to falling bank funding costs, limits to monetary policy and inflation pressures as justification for the MPC’s decision, according to Berenberg’s Wood.

“It would be hard to say they held because the recovery is gaining traction,” said Wood, who worked at the Bank of England until earlier this year. “I don’t expect the medium-term inflation forecast to move up dramatically, just a bit nearer the target. They will leave the door open to QE.”

The pound headed for a second weekly decline against the dollar, falling 0.1 percent to $1.5982 as of 8:26 a.m. in London. Government bonds rose, with the yield on the benchmark 10-year gilt dropping 3 basis points to 1.74 percent.

King will also be called to appear before Parliament’s Treasury Select Committee, which scrutinizes the central bank. He and other MPC members will take questions from the cross-party panel of lawmakers on the Inflation Report and the outlook for policy.

Credit Program

Even with QE halted, the Bank of England still has the Funding for Lending Scheme, which it set up with the U.K. Treasury and is aimed at boosting lending.

The FLS began in August and as of last month, 30 financial institutions had signed up, including Lloyds Banking Group Plc and Barclays Plc. The central bank will publish data on usage of the program by lenders on Dec. 3.

“I think credit easing is likely to have to bear more of the weight of applying policy,” Berenberg’s Wood said. “But QE will remain part of the bank’s toolkit and I think it would be rolled out in situations where the bank needed to do something really big.”

U.K. manufacturing data published this week showed output barely grew in September, indicating the economy’s rebound lost some momentum at the end of the third quarter. Separate services and factory surveys signaled cooling activity in October.

“Everything is pointing to a weak fourth quarter,” said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe and a former U.K. Treasury official. “We see them doing more QE in February. If we saw data suggesting growth was going to be firmer than that, we would suggest they hold back.”

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