King Confronts Recovery as BOE Seen Keeping QE on Hold
Armed with new quarterly economic forecasts, the nine-member Monetary Policy Committee will hold the target for asset purchases at 375 billion pounds ($583 billion), according to 43 of 44 economists in a Bloomberg News survey. King and Paul Fisher have voted for a 25 billion-pound increase since February, while David Miles has pushed for more quantitative easing for the past six months.
King will lead his penultimate meeting, before being replaced by Bank of Canada Governor Mark Carney on July 1, in light of data showing that the U.K. avoided a triple-dip recession in the first quarter. While some surveys for April suggest the recovery is building momentum, strains in the euro area that prompted a European Central Bank interest-rate cut last week might support the case for further stimulus.
“If I had to choose I’d say he’d continue to vote for more, but it’s a tricky call,” said David Tinsley, an economist at BNP Paribas SA in London and a former BOE official. “You can easily argue that the stimulus in place is already large and should be given time to work. But equally you can talk up the risks, and there are plenty of them.”
The bank will also keep its key interest rate at a record low of 0.5 percent, according to all 52 economists in a separate poll. Minutes of the decision, showing how officials voted, will be published May 22.
The pound rose against the dollar and was trading at $1.5575 as of 9:57 a.m. London time, up more than 0.2 percent on the day, after data today showed industrial production rose more than economists forecast in March. The yield on the 10-year U.K. government bond was up 1 basis point at 1.78 percent.
The U.K. economy grew 0.3 percent in the first quarter as services expanded. Surveys last week showed activity at businesses from banks to airlines strengthened in April, while slumps in manufacturing and construction eased. The FTSE 100 Index has risen 12 percent this year and reached its highest in more than five years yesterday.
Industrial output rose 0.7 percent in March from February, more than three times the 0.2 percent median prediction in a Bloomberg survey of 31 economists, as cold weather boosted demand for electricity and gas. Manufacturing rose 1.1 percent, compared with a 0.3 percent median forecast.
Recent signs of recovery may reinforce the position of the six-member majority on the MPC that has been resisting King’s push to expand QE on concern that such a move may stoke inflation expectations.
Consumer-price growth was 2.8 percent in March, extending into a fourth year its run above the BOE’s 2 percent target. The 10-year breakeven rate, a gauge of investor expectations of inflation derived from the difference in yield between regular and index-linked bonds, was 3.13 percentage points, the highest among Group of Seven nations, Bloomberg data show.
Nevertheless, with the economic recovery not yet assured, the BOE and the U.K. Treasury expanded their Funding for Lending Scheme last month to boost credit to small- and medium-sized businesses. That gives the majority on the MPC another reason to refrain from expanding QE, according to Kevin Daly, U.K. economist at Goldman Sachs Group Inc.
“They will point to the FLS, the credit easing that’s taken place already, as sufficient easing for now,” he said in an interview on Bloomberg Television. “More significant changes will take place under Carney.”
U.K. Chancellor of the Exchequer George Osborne, who says his strategy is “fiscal responsibility and monetary activism,” has laid the groundwork for Carney’s arrival.
He broadened the BOE’s remit in March to allow officials more flexibility to provide stimulus and asked it to review the merits of forward guidance on policy. Carney has said that central banks aren’t “maxed out” in their ability to provide aid to ailing economies.
Other major central banks are adding stimulus. The Reserve Bank of Australia cut interest rates this week as cooling inflation and a strong currency gave it room to ease policy. Poland’s central bank lowered its benchmark by a quarter point to 3 percent yesterday. The Bank of Korea followed that lead today, lowering the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent.
The ECB cut its key rate to a record low of 0.5 percent on May 2 and President Mario Draghi said policy makers have an “open mind” on reducing their deposit rate below zero. Officials also extended a policy of unlimited bank lending to mid-2014 to help pull the economy out of a recession. The U.S. Federal Reserve said the previous day it will continue bond purchases until the labor market improves “substantially.”
The International Monetary Fund forecasts that the U.K. economy will expand 0.7 percent this year, while inflation will average 2.7 percent. The U.S. will expand 1.9 percent, it said.
The BOE will release its new forecasts at its quarterly Inflation Report on May 15. After an external review of its forecasting, it will publish the data underlying the so-called fan-chart projections this month and introduce further changes thereafter.
Tinsley at BNP Paribas said the new forecasts might include a reduction in the outlook for the peak of inflation this year. In February, the BOE said that inflation would reach 3.2 percent in the third quarter.
Oil prices fell to the lowest since December on April 18, though they’ve rebounded since then. The pound has rallied on a trade-weighted basis since touching the lowest in more than 1 1/2 years in March, easing import-price pressure in the economy.
A report published today by KPMG LLP and the Recruitment and Employment Confederation showed indexes of U.K. pay growth for full-time and temporary staff declined in April compared with March.
At the same time, threats to the recovery remain. The euro-area economy, Britain’s biggest export market, will shrink 0.3 percent this year, according to the IMF. U.K. unemployment rose at the fastest pace in more than a year in the three months to February. KPMG and REC said today that while their gauge of full-time hiring rose to 52.5 from 50.8, a measure of part-time billings fell to 48.7 from 51. Results above 50 indicate growth.
Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official, said King, Fisher and Miles will keep up their call for more QE this month.
“There’s more of a chance this month that someone will do a U-turn on their vote; even so, I’m not expecting any of them to do so,” she said. “The arguments on why there should be more stimulus still hold.”
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