Bank of England Maintains Stimulus as Credit Plan Shows Results
Bank of England policy makers refrained from adding further stimulus to the U.K. economy today after their new credit-boosting program showed signs of success.
The nine-member Monetary Policy Committee led by Governor Mervyn King kept the target for quantitative easing at 375 billion pounds ($602 billion), in line with the forecast of all 39 economists in a Bloomberg News survey. They also held the key interest rate at a record low of 0.5 percent.
While the bank’s five-month-old Funding for Lending Scheme is starting to loosen credit conditions, the economy remains at risk of succumbing to a renewed recession. That’s left policy makers weighing signs of strength against threats from the euro crisis and Prime Minister David Cameron’s austerity drive, the deepest since World War II.
“Most members of the committee are probably pretty happy to keep things as they are and see how the FLS evolves and how the economy picks up,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official. “There’s a possibility of more QE. If in a few months’ time it looks like output is stagnating, growth concerns will come to the fore.”
The Bank of England will publish the minutes of the MPC’s meeting on Jan. 23. In December, eight of the nine members voted to keep QE unchanged, with David Miles pushing for a 25 billion- pound increase.
The U.K. recovery’s struggle to gain traction may justify further stimulus later this year, according to Kevin Daly, an economist at Goldman Sachs Group Inc. in London. That may be an issue for Bank of Canada Governor Mark Carney, who is set to succeed King at the helm of the U.K. central bank from July.
Additional stimulus is “more likely” to focus on credit- easing measures than bond purchases, Daly said in a note yesterday. “But it could also extend to more radical options, including the greater use of policy guidance -- a possibility raised by Carney -- and the direct purchase of bank debt,” he said.
At this month’s meeting, U.K. policy makers digested mixed economic data with the fact that inflation remains above their 2 percent target. They will also have had to assess the state of the global recovery after U.S. lawmakers reached a deal to avert the so-called fiscal cliff and euro-area debt tensions subsided.
The FTSE-100 Index (UKX) rose 0.1 percent today after closing yesterday at the highest since May 2008.
The Bank of England’s Credit Conditions survey last week showed that the availability of mortgages rose “significantly” in the fourth quarter and demand also increased. While there was also an improvement in corporate lending conditions, this was more pronounced for large firms than for small ones.
A manufacturing index surged to a 15-month high in December, according to another report. Still, services shrank for the first time in two years last month, increasing the chance the U.K. may have contracted in the fourth quarter.
Tesco Plc (TSCO), the biggest U.K. grocer, reported the strongest sales growth since 2010 as money-off coupons and an enhanced food offering helped spark a revival. Next Plc (NXT), the U.K.’s second-largest clothing retailer, said Jan. 3 the consumer climate will remain “subdued, but steady” this year.
Cameron said on Jan. 6 that the U.K. is in a “tough economic environment” and the government must sustain a “credible strategy” for the budget deficit to keep borrowing costs down. The yield on the 10-year gilt was at 2.05 percent today, up from a record-low 1.41 percent in July.
With the recovery still not on a sound footing, economists in a Bloomberg survey forecast that the BOE will resume bond purchases at some point this year. At its meeting next month, the MPC will have new economic forecasts prepared for its quarterly Inflation Report, as well as the first estimate of gross domestic product for the fourth quarter.
“The November Inflation Report suggested that the majority of MPC members are relatively comfortable with the current policy stance,” said Annalisa Piazza, an analyst at Newedge Group in London. “In our view, the recent dataflow has not changed the fundamental picture much.”
Some policy makers may also be averse to adding to stimulus with inflation at 2.7 percent. In the minutes of its December meeting, the MPC noted “substantial risks” to the price outlook, including from “continuing adverse weather” that could disrupt harvests and push up food prices.
“Inflation is another factor that will make them reluctant to do more QE as it’s likely to come out a little bit higher than previously expected,” said Joost Beaumont, an economist at ABN Amro Bank NV in London. “The first quarter won’t be something to write home about, but further out, I expect the economy to recover very gradually, but to recover. If the BOE has the same idea, QE is off the cards.”
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