King Calls Time Surveying Recovery Not Yet Assured: U.K. Credit
Bank of England policy makers maintained stimulus for the economy after Governor Mervyn King concluded his last policy meeting surveying a recovery that’s not yet strong enough to warrant the “escape velocity” sought by his successor, Mark Carney.
The nine-member Monetary Policy Committee held its target for bond purchases at 375 billion pounds ($580 billion), in line with the median estimate in a Bloomberg News survey of 43 economists. The meeting was King’s 194th, and he will hand Carney on July 1 an economy that resumed growth in the first quarter and may have picked up in the current period.
Manufacturing and services strengthened in May, helping send gilts to the worst performance among Group of Seven nations over the past month as investors bet the prospect of more quantitative easing is receding. While King said there are “signs now of a recovery,” growth isn’t as fast as he would like. Carney arrives having professed support for tools such as forward guidance, and risks may persuade other panel members to join his cause.
“Although the recent economic news has generally been encouraging, it remains hard to see what part of the economy can power a sustainable recovery,” said Vicky Redwood, economist at Capital Economics Ltd. and a former central bank official. “We still expect the new governor to take action soon after he arrives in July.”
The BOE also kept its key interest rate on hold at 0.5 percent, a record low. In Frankfurt, the European Central Bank held its benchmark rate at 0.5 percent after cutting it by a quarter point last month.
The pound rose for a second day against the dollar and was at $1.5447 as of 12:52 p.m. London time, up 0.3 percent from yesterday. Gilts were little changed, with the 10-year yield at 2 percent.
“King will be pleased to be leaving at a point when growth is picking up, though it must be hard for any of us to feel satisfied,” said Kate Barker, who retired from the MPC in 2010. “It’s not recovering at the kind of rate that comes up to escape velocity and the question is whether monetary policy alone is enough to do that. I’m skeptical.”
King’s retirement brings to an end a two-decade career at a central bank that he helped steer as it gained independence in 1997. Inflation targeting began a year after he joined as chief economist in 1991, while he implemented the quarterly Inflation Report in 1993 and held a press conference for every publication. “I have had my say,” he said at the last such event on May 15.
King became governor in 2003 and was reappointed in 2008. After a first term he described as “NICE,” an acronym for “non-inflationary consistent expansion,” his second was marked by the financial crisis, bank bailouts and Britain’s longest economic slump in decades. His early handling of the turmoil and the collapse of Northern Rock Plc drew criticism from lawmakers.
He subsequently set up programs to help provide liquidity to lenders, cut the benchmark interest rate to a record low and pumped billions of pounds into the economy via gilt purchases.
“The stimulus provided by the bank means that there are now good reasons to suppose that a gentle recovery is under way,” King said in the BOE’s annual report on June 4.
The U.K. returned to growth in the first three months of the year with expansion of 0.3 percent, and the BOE forecasts 0.5 percent growth in the current quarter. Measures of services and manufacturing were at the highest in 14 months in May.
“The economy is definitely in a better shape than it was a year ago,” said George Buckley, an economist at Deutsche Bank AG. “He is going out on a tentatively comforting note.”
In the U.K., the brighter outlook has reduced the chance of more QE. The median forecast in a Bloomberg survey is for bond purchases to rise to 400 billion pounds by the end of the year. That’s down from 425 billion pounds a month ago.
Officials finished their third round of bond purchases seven months ago, and that may be enough, some economists say. Malcolm Barr at JPMorgan Chase & Co. in London cited improved economic data when he changed his forecast yesterday to no more QE from a previous prediction for a restart in August.
Gilts handed investors a loss of 2.5 percent over the past month, according to the Bloomberg U.K. Sovereign Bond Index. That compares with a 1.3 percent loss on German debt and 1.4 percent on U.S. Treasuries, according to separate indexes.
The central bank raised its growth forecasts last month and said inflation will peak at a lower level than previously expected.
Still, the U.K. hasn’t yet fully shaken off the financial crisis, and gross domestic product is about 2.5 below its peak level. With continuing risks from Europe and a banking system under repair, BOE officials have given no signal that they’re looking at unwinding stimulus.
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