King Seen Maintaining QE as Osborne Extends Fiscal Squeeze

U.K. Chancellor of The Exchequer George Osborne
George Osborne, U.K. chancellor of the exchequer. Photographer: Chris Ratcliffe/Bloomberg

Bank of England officials may today leave their bond-buying program on hold as they assess the need for more stimulus a day after Chancellor of the Exchequer George Osborne committed the country to five more years of austerity.

Governor Mervyn King and the Monetary Policy Committee will probably leave their quantitative-easing target at 375 billion pounds ($604 billion), according to a Bloomberg News survey of economists. Still, they have left the door open to more purchases if needed, and Osborne said yesterday his “credible” fiscal plan “allows for supportive monetary policy.”

The central bank is struggling to stoke a recovery amid a squeeze on consumers and headwinds from Europe’s debt crisis. Bank of Canada Governor Mark Carney was appointed last month to lead that effort from July, and Osborne’s affirmation yesterday of his fiscal strategy confirmed the BOE’s role as the key source of stimulus for the economy.

“There’s no prospect of any unwinding of any quantitative easing before Mervyn leaves, or a rate increase,” said David Tinsley, an economist at BNP Paribas SA and a former central bank official. “In fact the risks lately have shifted a bit to doing more QE because the data haven’t been so good.”

All 36 economists in the Bloomberg poll see no increase in gilt purchases today, while the median forecast in a separate survey is that the benchmark interest rate will remain at a record-low 0.5 percent. The central bank will announce the decisions at noon in London.

The pound rose 0.1 percent against the dollar today and was trading at $1.6114 as of 9:58 a.m. in London. The yield on the 10-year gilt rose 2 basis points to 1.8 percent.

Carney’s Term

In his autumn statement to Parliament, Osborne cut his forecasts for economic growth and pushed out the term of his budget squeeze to 2018. Carney is due to serve as BOE governor until June of that year. The Office for Budget Responsibility sees the economy expanding 1.2 percent next year instead of the 2 percent predicted in March.

The European Central Bank will publish new projections after its governing council meets in Frankfurt today. The ECB will hold the benchmark rate at a record low of 0.75 percent, according to 56 of 61 economists in a Bloomberg survey.

Two days ago, the Bank of Canada held its key rate at 1 percent. Carney kept his bias to raise rates, saying economic growth will accelerate next year and a “small degree of slack” in the economy will gradually disappear.

King’s Assessment

The OBR’s forecast cuts follow King’s downbeat assessment of the economy last month. The governor said the U.K. faces a “zig-zag” recovery after its first double-dip recession since the 1970s ended in the third quarter. Surveys this week showed manufacturing shrank in November while growth in construction and services weakened.

The MPC finished its latest 50 billion-pound round of QE last month. Since then, King said the MPC hasn’t lost faith in QE, “nor has it concluded that there will be no more purchases.”

“With the OBR growth forecast, which is still probably at the optimistic end of the spectrum, there’s no reason for monetary policy to put its foot on the brakes,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “We have years of loose monetary and tight fiscal policies ahead of us.”

Fiscal Measures

Osborne announced a range of measures aimed at boosting the economy yesterday, including a 1 percentage point cut in the corporation-tax rate. To help pay for the move, a levy on banks will increase in January.

Osborne said he’ll miss his target to start cutting debt as a percentage of gross domestic product in 2015 by a year. His plans drew attacks from the opposition Labour Party, which says he is damaging the economy by trying to cut the deficit too quickly.

While Britain’s economy grew 1 percent in the quarter through September, the London Olympics contributed to the surge. The Bank of England said last week that the prospects for financial stability have improved a little since June, though threats from Europe remain “considerable.”

The continued risks to growth underpin policy makers’ refusal to tighten policy as inflation, now at 2.7 percent, remains above their 2 percent goal. Rising utility prices and an increase in university tuition fees threaten to stoke further gains in consumer prices.

Bank of England Deputy Governor Charles Bean, who has extended his term by a year to June 2014 to assist Carney through his first months in London, said last week that U.K. domestic inflation is “not too much of a concern” and officials haven’t closed the door on further asset purchases.

“Monetary policy shouldn’t be worried about a temporary rise in inflation in the next few months,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official. “They’re going to do at least another 50 billion pounds of QE next year, but it’s not clear if they’ll do it before or after Carney gets there.”

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