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BOE Seen Keeping QE on Hold as Credit-Plan Impact Begins to Show

Bank of England policy makers will maintain their bond-buying program next week as new efforts to boost credit begin to show results, economists said.

Governor Mervyn King and the Monetary Policy Committee will maintain the quantitative-easing target at 375 billion pounds ($601 billion), said all 39 economists in a Bloomberg News survey. They will also leave their benchmark interest rate at a record-low 0.5 percent in a decision to be announced at noon on Jan. 10, according to a separate poll.

U.K. credit conditions eased in the fourth quarter and spreads on mortgage rates declined because of the so-called Funding for Lending Scheme that began in August, according to a report this week. Still, services unexpectedly slumped in December, raising the risk of an economic contraction, and economists in the survey forecast more QE at some point in 2013.

“Even if the economy does not shrink again, it is likely to continue to underperform in 2013 and 2014,” Citigroup Inc. economists including Michael Saunders in London said in a report. “With this backdrop, the MPC probably will keep monetary policy loose and indeed loosen further.”

King has left the door open to more stimulus, and Citigroup said that QE will be increased to 450 billion pounds in the next year. It noted “mixed signals” on the FLS, saying that while rates on mortgages and new business loans have fallen, “very little new lending is actually taking place.”

Carney Initiative

With King due to retire in June, Citigroup said it expects the BOE to introduce forward rate guidance under incoming governor Mark Carney, who now heads the bank of Canada. Carney has used such a tool in his current role.

“Such statements can help anchor market rate expectations, reduce uncertainty about the central bank’s reaction function and hence magnify the desired policy stimulus,” Saunders said. “Flexibility is retained by making the rate guidance conditional on the forecast, and hence subject to change if the economic outlook changes.”

Britain’s economy exited a recession in the third quarter, though the BOE has said it may shrink again in the fourth. Markit Economics said yesterday a composite of its manufacturing, services and construction indexes is consistent with the economy contracting by about 0.2 percent.

“Although the committee’s policy bias is tilted towards sanctioning more asset purchases, we consider any move at this point to be unlikely,” said Philip Shaw, an economist at Investec Securities in London. “Although there have since been one or two notable weak spots in the data, December’s services PMI being the obvious recent example, the general tone of indicators has more been mixed than soft.”

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