BOE Confronts QE Potency as It Mulls Halting U.K. Stimulus
Bank of England officials will confront growing concerns about the potency of their main policy tool today as they consider halting bond purchases for an economy that may still need support.
While 35 of 45 economists in a Bloomberg News survey forecast a halt to the asset-buying program at 375 billion pounds ($599 billion) in a decision to be announced at noon in London, Royal Bank of Scotland Group Plc and Berenberg Bank say the decision will be “close.” The remainder see quantitative easing being increased by as much as 50 billion pounds.
The bind for Governor Mervyn King and the Monetary Policy Committee is whether to rely on QE to bolster the cooling economy, or focus on credit-boosting initiatives such as the Funding for Lending Scheme. Adding to the debate are warnings from some officials that looser policy now may not be the right move as inflation slows less than previously forecast and threatens to stay above their target into next year.
“The decision is going to be very tight, almost too close to call,” said Rob Wood, chief U.K. economist at Berenberg in London, who worked at the Bank of England until earlier this year. “With weak growth pulling in one direction, policy limits pushing in the other, it’s hard to know how they’re going to balance that.”
The central bank completed its latest 50 billion pounds of bond purchases last week, and Deputy Governors Paul Tucker and Charles Bean have indicated asset purchases may no longer have the same impact on the economy as when first introduced in 2009. King has warned in the past month of limits to monetary policy to stimulate spending.
The Bank of England will also leave its key interest rate at a record low of 0.5 percent, said all 55 economists in a separate survey.
The pound fell 0.1 percent against the dollar and was at $1.5971 as of 8:28 a.m. in London.
In Frankfurt today, the European Central Bank will leave its benchmark rate at a record low of 0.75 percent, according to 62 of 63 economists in a survey. One predicts a cut to 0.5 percent. The decision is due at 1:45 p.m. and President Mario Draghi will hold a press conference 45 minutes later.
The ECB unveiled a bond-purchase plan in September to ease the debt crisis in the euro area, though as yet no country has applied for the program. The European Commission cut its 2013 growth forecast for the currency zone yesterday to 0.1 percent and said the region’s turmoil is one of main risks to Britain.
“The U.K. outlook and data are rather mixed,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “Activity is worsening, and euro zone problems are still lingering.”
Spurring calls for more to be done, Britain’s economy is showing signs of cooling after emerging from recession in the third quarter with the strongest growth since 2007. Indexes of manufacturing and services declined in October and a measure of retail sales plunged, reports in the past week showed.
The Bank of England’s latest step to help the economy was the FLS, which began in August and aims to boost lending. As of last month, 30 financial institutions had signed up, including Lloyds Banking Group Plc and Barclays Plc.
Even with risks to growth remaining, inflation concerns may deter some Bank of England officials from backing more stimulus today. Martin Weale has questioned whether loosening policy is right with inflation above the BOE’s 2 percent target, while fellow MPC members Ben Broadbent and Spencer Dale have also highlighted price risks.
Inflation was at 2.2 percent in September and King said last month that it will stay above the goal “well into next year.” The MPC will have new forecasts at today’s meeting, which it will publish next week. Minutes of the meeting, showing how the committee voted, will be released on Nov. 21.
While the central bank’s bond-buying program has helped push down long-term borrowing costs, Bean said last week that consumers’ and businesses’ concerns about the outlook may undermine its impact on the economy. The yield on the 10-year gilt was at 1.76 percent yesterday, about half the level before the Bank of England started asset purchases in March 2009.
One factor that may influence the MPC is a potential impact on the pound of a halt to stimulus in an environment where many other central banks are continuing to loosen, said Kevin Daly, an economist at Goldman Sachs Group Inc. The Federal Reserve last month affirmed its decision to buy $40 billion of mortgage- backed securities a month.
“If they don’t do QE this week, they may get the wrong type of tightening,” Daly said on Bloomberg Television’s “City Central” on Nov. 5. “You could get a rise in the exchange rate, therefore a tightening of financial conditions, which will contribute to a slowing in the economy, which is the opposite of what the economy needs now.”
The pound has risen about 4 percent on a trade-weighted basis in the past year.
For ABN’s Beaumont, the BOE may opt to keep stimulus going as it awaits euro-area developments and monitors how the U.S. deals with the fiscal cliff, the $607 billion of tax increases and spending cuts set to kick in automatically in January.
“You err on the safe side and buy yourself time to at least see for the next three months,” he said. “You will have a much clearer picture of where the economy is heading.”
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