BOE Keeps Stimulus on Hold as Osborne Extends Fiscal Squeeze
Bank of England officials left their bond-buying program on hold as they assessed the need for more stimulus a day after Chancellor of the Exchequer George Osborne committed the country to five more years of austerity.
Governor Mervyn King and the Monetary Policy Committee kept their quantitative-easing target at 375 billion pounds ($604 billion), a move predicted by all 36 economists in a Bloomberg News survey. Still, they have indicated the door is open to more purchases if needed, and Osborne said yesterday his “credible” fiscal plan “allows for supportive monetary policy.”
The Bank of England is struggling to stoke a recovery amid a squeeze on consumers, cooling global growth and headwinds from Europe’s debt crisis. It introduced its Funding for Lending Scheme this year to boost credit, and Osborne’s affirmation of his fiscal strategy confirmed the central bank’s role as the key source of stimulus for the economy.
“The scope for easier fiscal policy is pretty limited in the U.K.,” Kevin Daly, an economist at Goldman Sachs Group Inc. in London, said in an interview with Guy Johnson on Bloomberg Television today. “The slack needs to be closed through much easier monetary policy and specifically credit policy.”
The Bank of England also left its key interest rate at a record low of 0.5 percent.
Faith in QE
U.K. 10-year gilts stayed little changed after the decisions. The yield on the securities was at 1.77 percent as of 12:30 p.m. London time. The pound remained higher against the dollar, and was trading up 0.1 percent at $1.6118.
The MPC finished its latest 50 billion-pound round of QE last month. Since then, King said the MPC hasn’t lost faith in QE, “nor has it concluded that there will be no more purchases.” The minutes of today’s meeting, showing how officials voted, will be published on Dec. 19.
The European Central Bank left its benchmark rate at a record low of 0.75 percent after a meeting in Frankfurt today. Two days ago, the Bank of Canada held its key rate at 1 percent. Governor Mark Carney, who will succeed King at the U.K. central bank in July, kept his bias to raise rates, saying economic growth will accelerate next year and a “small degree of slack” in the economy will gradually disappear.
In his autumn statement to Parliament, Osborne cut his forecasts for economic growth and pushed out the term of his budget squeeze by a year to 2018. The Office for Budget Responsibility sees the economy shrinking 0.1 percent this year and expanding 1.2 percent next year, less than the 2 percent predicted in March.
“You’re going to have tight fiscal policy combined with ultra-loose monetary policy and that will remain the case,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “The risks to the growth outlook are still a little bit to the downside and the fiscal consolidation in the U.K. next year will be harder than this year, so that will bite.”
The OBR’s forecast cuts followed King’s downbeat assessment of the economy last month. The governor said the U.K. faces a “zig-zag” recovery after its first double-dip recession since the 1970s ended in the third quarter. Surveys this week showed manufacturing and construction shrank in November while services growth weakened.
With a weaker economic outlook, Osborne said he’ll miss his target to start cutting debt as a percentage of gross domestic product in 2015 by a year. Fitch Ratings said that “weakens the credibility” of the U.K. and it will review the country’s top credit grade after the budget.
The continued risks to growth underpin BOE officials’ refusal to tighten policy as inflation, now at 2.7 percent, remains above their 2 percent goal. Rising utility prices and an increase in university tuition fees threaten to stoke further gains in consumer prices.
Bank of England Deputy Governor Charles Bean, who has extended his term by a year to June 2014 to assist Carney through his first year at the BOE, said last week that U.K. domestic inflation is “not too much of a concern” and officials haven’t closed the door to further asset purchases.
Philip Shaw, an economist at Investec Securities in London, said he expects the economy to “show some signs of life again” early next year and that accelerating inflation will stop the MPC expanding QE in 2013. Still, it will be a “close-run thing.”
“Doubts over the momentum of the recovery suggest there will still be some serious discussions over whether to sanction further asset purchases,” he said.
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