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Gieve Sees Substantial Chance BOE Expands Stimulus This Week

John Gieve, a former deputy governor at the Bank of England, said the central bank may expand stimulus this week as the recovery struggles to gain traction.

The nine-member Monetary Policy Committee halted bond purchases in November and has shifted its focus to the Funding for Lending Scheme, which aims to stoke growth by providing banks with access to cheap funding. Gieve said policy makers may question if they’ve done enough at their meeting this week.

“I think they will approach this week’s meeting with the question: ‘are we sure that FLS is enough, have we done enough?’” Gieve said at Fathom Consulting’s Monetary Policy Forum in London today. “And I would find it very difficult, if I was on the MPC, to sign up to that.”

All 43 economists in a Bloomberg News survey forecast that the MPC will leave the target for QE at 375 billion pounds ($590 billion). The meeting starts on Feb. 6 and the central bank will announce the decision at noon on Feb. 7.

“There’s a substantial chance they could do something,” Gieve said. “It seems the announcement effect is considered key now and since it would be unexpected, that could be large.”

Maturing Gilts

The BOE has been buying gilts since March 2009 and the first of those securities will mature next month. Gieve said policy makers may decide to replace those bonds. There are 6.1 billion pounds of debt maturing in March, and another 1.6 billion in September, central bank data show.

The MPC tends to change policy when it’s completed its quarterly forecasting round, and officials will meet this week with new projections. Governor Mervyn King, who retires at the end of June, will hold a press conference next week to present the quarterly Inflation Report. Gieve said this week may be among King’s last to effect a big change.

“The next forecast in May will be his last,” Gieve said. “I’m sure it would be difficult for him to come back and say things are worse than we thought and we need to do more QE and maybe should have been doing so over the past six months on his last Inflation Report.”

He also said the bank may need a new remit to help to clarify its aims since its been expanding stimulus even with inflation above its 2 percent target for the past three years. The BOE’s goal has been discussed since Governor-designate Mark Carney in December discussed the merits of targeting nominal gross domestic product, and said last month that central banks can continue to support growth as policy isn’t “maxed out.”

Policy Targets

Also speaking at the Fathom event, former Bank of England policy maker Charles Goodhart said the bank’s problem was that it didn’t provide enough stimulus, not that its mandate constrained its actions.

“The inflation target has done us very well over the years its been in place and I don’t think it’s prevented the authorities from taking expansionary measures,” he said. “The problem has been that they didn’t undertake the expansionary measures sufficiently well enough.”

Another ex-BOE official, Andrew Sentance, said policy makers ought to have stuck closer to their target, and that a shift to NGDP would generate “considerable problems.”

“I don’t think we should be shifting away from inflation target,” he said. “If anything, we should be sticking closer to it.”

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