King Moves Toward Bernanke in Push to Stimulate Economy, Avoid Recession
Economists at JPMorgan Chase and Co. and RBC Capital Markets see the U.K. central bank starting to buy 50 billion pounds ($77 billion) of assets by November after most of its policy makers said more so-called quantitative easing is “increasingly probable.” JPMorgan economist Malcolm Barr in London said weak survey data could prompt a move in October.
A cooling global economy and the threat from Europe’s debt crisis have refocused policy makers’ attention away from inflation risks to avoiding a slide back into recession. The Fed late yesterday said it will rebalance its Treasury holdings to cut longer-term borrowing costs, Sweden’s Riksbank said slowing growth may warrant a rate cut, while the Swiss National Bank lowered its benchmark to zero earlier this month.
“Concerns about inflation carry much less weight now that the focus has shifted to growth,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “They’ve given a clear steer that they’ll announce more asset purchases in the coming months, if not October then November is quite likely.”
The pound fell as much as 0.3 percent against the dollar today, dropping to an eight-month low. It traded at $1.5465 as of 8:55 a.m. in London, from $1.55 yesterday. Government bonds rose, with the yield on the 10-year gilt falling 6 basis points to 2.36 percent.
Minutes of the central bank’s Sept. 7-8 meeting published yesterday showed that officials now see second-half growth being “materially weaker” than previously projected. They will announce their next policy decision on Oct. 6.
The International Monetary Fund cut its 2011 and 2012 U.K. economic growth forecasts this week to 1.1 percent and 1.6 percent. The Washington-based IMF previously projected expansion of 1.5 percent and 2.3 percent respectively.
While most of the Monetary Policy Committee sees more QE as likely, Bank of England Chief Economist Spencer Dale indicated yesterday he may not be among that group. Dale, who ended a push for a rate increase in August, said any decision on stimulus needs to be “weighed against the backdrop of continuing high inflation.”
The bank has forecast that consumer-price growth will accelerate to 5 percent in the coming months, more than twice its target. At the same time, economic expansion slowed to 0.2 percent in the second quarter, consumer confidence is declining and manufacturing and services gauges fell in August.
“With the risk of recession, everything possible has to be done,” Mario Blejer, who was an adviser to King from 2003 to 2008, said in an interview. “U.K. inflation is already too high and there are issues about the bank meeting its target. But in the current context, the damage from a second recession overwhelms all the other issues.”
The Fed said yesterday it would replace much of the short- term debt in its portfolio with longer-term Treasuries in a move dubbed “Operation Twist.” The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.
Barclays Capital said Sept. 20 that the European Central Bank will cut its benchmark interest rate by a quarter point to 1.25 percent next month, reversing one of its increases earlier this year, in an attempt to ease tensions on money markets.
Pressure on the Bank of England to aid the recovery is growing as Chancellor of the Exchequer George Osborne vows to stick to his spending-cut plan to reduce the deficit, a move that opposition politicians say is undermining the recovery. Business Secretary Vince Cable repeated a call yesterday for the central bank to expand beyond its government bond purchases.
Britain is facing the fifth-largest fiscal squeeze among advanced economies, according to IMF data analyzed by the London-based Institute for Fiscal Studies. Only Greece, Ireland, Portugal and Iceland are on course to see deeper cuts to 2015.
The MPC minutes showed officials voted 8-1 to keep the bond program unchanged and were unanimous in holding the key interest rate at a record-low 0.5 percent. Still, the decision to maintain the current stimulus was “finely balanced.”
Morgan Stanley currency strategist Tim Davis said yesterday that the pound, which has fallen 6 percent against the dollar in the last month, may weaken further as the Bank of England moves closer to policy loosening.
“The pound had been supported by safe haven flows attracted by the U.K.’s stable monetary and fiscal policy, but the increased prospect of QE may have significantly removed this pillar of support,” Davis said in a note, adding he sees the currency at $1.53 by the end of the year. “We remain fundamentally bearish.”
Adam Posen, who has been voting for a 50 billion-pound expansion of the bond program since November, stepped up his push this month, saying the bank may need to buy as much as 100 billion pounds within three months and that officials’ delay in acting has made economic prospects “worse.”
“Additional QE may not be far away,” said Jamie Dannhauser, an economist at Lombard Street Research in London. “Unless there is an improvement in financial-market conditions, the MPC may be minded to ease policy as soon as next month, at the latest in November.”
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