BOE to Reinvest Maturing Gilts as Stimulus Policy Sustained
The Bank of England will reinvest the first gilts to mature since it started its asset-purchase program four years ago as it sustains stimulus for an economy in a “slow” recovery.
The Monetary Policy Committee led by Governor Mervyn King will buy more bonds with the 6.6 billion pounds ($10.4 billion) associated with a gilt maturing March 7, the BOE said in a statement today. The bank also held its target for quantitative easing at 375 billion pounds and said inflation may remain above its 2 percent target for the next two years.
The decision came as Bank of Canada Governor Mark Carney, who will succeed King in July, told lawmakers that the BOE’s current policy may be enough to help the economy achieve “escape velocity.” The gilt reinvestment shows officials want to avoid tightening policy as the U.K. confronts the risk of an unprecedented triple-dip recession. While inflation is likely to remain above target longer than previously forecast, the MPC said it would “look through” this temporary factor.
“This statement highlights the acute dilemma faced by the MPC,” said Simon Hayes, an economist at Barclays Plc in London. “The weak activity outlook begs for more stimulus, but the inflation outlook is not sufficiently benign to make the committee comfortable expanding policy further.”
The pound remained higher against the dollar after the announcement. It was trading at $1.5712 as 12:47 p.m. London time, up 0.3 percent from yesterday. Gilts fell, pushing the 10- year yield up 3 basis points to 2.13 percent.
On inflation, the BOE said it may accelerate in the near- term because of blamed increases in regulated prices such as energy bills as well as the decline of the pound. The forecast for price growth compares with King’s prediction last month that it would exceed the goal “for much of this year.”
Explaining its decision today, the MPC said that “attempting to bring inflation back to target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.”
The central bank also said today that it “stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.”
The U.K. “is set for a slow but sustained recovery,” it said. “But the risks are weighted to the downside, not least because of the challenges facing the euro area.”
In Frankfurt today, the European Central Bank kept its benchmark rate at 0.75 percent, as forecast by all 60 economists in a Bloomberg survey.
The purchases of gilts that began in 2009 marked a new policy front for the BOE in its fight against the recession.
The bank halted purchases in November as officials shifted focus to their Funding for Lending Scheme, which started Aug. 1 and is intended to stoke growth by unblocking credit strains. The MPC said today that the FLS will be one factor that may help bolster growth this year.
The BOE didn’t say what it will do with future gilt redemptions. It said the 6.6 billion pounds comprises the redemption payment on the gilt, as well as the cash flow resulting from the indemnity provided by the Treasury to cover any difference between the redemption payment and the original amount invested. It bought the securities at an average price of about 107.3 percent of face amount, its data show.
In his testimony today, Carney endorsed the BOE’s decisions to look through above-target inflation, saying central banks should be flexible. He has triggered a debate on the U.K. central bank’s remit with comments on nominal gross domestic product targets and how far policy makers can go to generate recoveries.
“Flexible inflation targeting -- as practiced in both Canada and the U.K. -- has proven itself to be the most effective monetary policy framework implemented thus far,” Carney said. “As a result, the bar for alteration is very high.”
The BOE’s decision not to expand QE and to hold its key interest rate at a record-low 0.5 percent were forecast by all economists in two Bloomberg News surveys. Minutes of the decision will be published on Feb. 20. The MPC had new forecasts at the meeting that King will present at a press conference in London on Wednesday.
The National Institute of Economic and Social Research cut its 2013 U.K. growth forecast to 0.7 percent from 1.1 percent this week and said the economy is at risk of a prolonged stagnation.
Still, there are signs the economy may be strengthening after shrinking 0.3 percent in the fourth quarter. Data today showed manufacturing output rose 1.6 percent in December, twice as much as the median forecast in a Bloomberg News survey. Total industrial production increased 1.1 percent. A survey this week showed services unexpectedly expanded in January.
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