BOE Maintains Bond Program as Cameron Keeps Deficit Focus
The Bank of England persisted with its quantitative-easing program today after Prime Minister David Cameron reiterated his budget plans, leaving the central bank carrying the burden of reviving Britain’s economy.
With Cameron reaffirming his strategy to reduce the deficit, ministers are stressing the role of the central bank in getting the U.K. out of a recession. The Monetary Policy Committee kept its bond-purchase target at 375 billion pounds ($596 billion), as forecast by 38 of 39 economists in a Bloomberg News survey. A separate poll shows economists see the MPC expanding stimulus to 400 billion pounds by the end of 2012.
Britain’s double-dip recession deepened in the second quarter as spending cuts at home and an escalating euro-area debt crisis undermined confidence and demand. European Central Bank President Mario Draghi will announce details of a bond- buying plan later today aimed at calming the debt crisis in the U.K.’s biggest trading partner.
“MPC members are in wait-and-see mode to gauge how recent policy initiatives feed into the U.K. economy,” said Nida Ali, an economist at Ernst & Young’s Item Club. “But the downside risks, particularly from the euro-zone crisis, remain significant. Were the crisis to worsen, the bank would be forced to provide far greater monetary support.”
The pound traded at $1.5911 as of 12:53 p.m. in London, little changed on the day. U.K. gilts stayed lower, with the yield on the 10-year rising 3 basis points to 1.68 percent.
The ECB refrained from cutting interest rates today and left the benchmark rate at a record low of 0.75 percent, as predicted by 28 of 58 economists in a Bloomberg survey. The remainder forecast a quarter-point cut. Investors are focused on Draghi’s press conference at 2:30 p.m. in Frankfurt when he may announce details of the plan to intervene in bond markets.
In the U.K., while gauges of services and manufacturing improved in August, the Bank of England has said the outlook remains “unusually uncertain.” It cut its economic forecasts last month, while the Organization for Economic Cooperation and Development lowered its outlook today. The OECD said gross domestic product will fall 0.7 percent this year instead of the previously predicted increase of 0.5 percent.
Cameron, who overhauled his Cabinet this week to reassert his authority after poor economic data and policy U-turns damaged his poll ratings, is refusing to bow to calls from the opposition Labour Party to change his fiscal plans.
“We’ve cut the deficit by a quarter already, and we are sticking to this course,” he wrote in the Mail on Sunday newspaper on Sept. 2. In Parliament yesterday, Cameron rejected criticism from Labour leader Ed Miliband, saying the opposition’s “only answer to a debt crisis is to spend more, borrow more and put up the debt.”
The government says the fiscal strategy is helping to insulate the U.K. from the euro-area debt crisis. Ten-year borrowing costs for Britain are at 1.67 percent, down from about 3.4 percent at the start of 2011. That compares with current rates of 5.45 percent for Italy and 6.27 percent for Spain.
“There is no simple alternative,” U.K. Business Secretary Vince Cable said on BBC radio on Sept. 2. “The way we have approached this is to make sure the government’s finances are in order so the Bank of England then has confidence to give stimulus through monetary policy. We’ve got to continue to work on that combination.”
Simon Wells, chief U.K. economist at HSBC Holdings Plc in London, said the government is “clearly looking for monetary policy to do the heavy lifting.”
“What people tend to overlook is that monetary policy has already done a lot of heavy lifting,” he said. “There’s a huge amount of uncertainty in the global macro economy at the moment so the bank seems to be in a prudent, wait-and-see mode.”
The Bank of England last expanded stimulus in July, announcing a 50 billion-pound program that runs until November. It started the Funding for Lending Scheme with the government in August to boost credit to companies and households.
All nine MPC members voted to leave the QE target unchanged last month. Still, minutes of the meeting showed some officials said a “good case could be made” for more asset purchases. The record of today’s MPC meeting, which will include former Confederation of British Industry economist Ian McCafferty for the first time, will be published on Sept. 19.
Nomura International Plc economist Philip Rush forecasts a 25 billion-pound increase in QE in November, though “no rate cut because it would be counterproductive.” Chris Crowe, an economist at Barclays Plc, sees a 50 billion-pound increase that month. While he also forecasts a quarter-point rate cut, this is a “marginal call,” he said.
“Although inaction is likely at the September meeting, we think that the policy debate on the committee may be particularly intense, reflecting uncertainty and disagreement along two dimensions,” Crowe said. “First, is more easing required? And second, what is the best means of delivering it?”
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