King Closer to Winning BOE Stimulus Debate After Factory SlumpScott Hamilton
Bank of England Governor Mervyn King may be closer to getting his way on stimulus after an unexpected slump in manufacturing raised the prospect of more bond purchases next week.
Citigroup Inc., ING Bank NV and BNP Paribas SA are among banks predicting a 25 billion-pound ($37.6 billion) increase in quantitative easing on March 7. The median of 39 economists is for the target to remain at 375 billion pounds, with 11 forecasting an increase, according to a Bloomberg News survey. That’s the biggest split among economists since July.
King and two other policy makers were defeated in a push for more bond purchases last month as the Monetary Policy Committee discussed measures including interest-rate cuts and policies to boost credit. Their cautious outlook for the economy was borne out yesterday by Markit Economics’ factory index, which fell to a four-month low as demand plunged.
“Most of the activity indicators point to an economy which is, at best, flat-lining,” said Andrew Goodwin, an economist at the Ernst and Young Item Club in London. “Having indicated their readiness to act, it is time for the MPC to deliver.”
All 52 economists in a separate survey say the MPC will leave its key interest rate at a record low of 0.5 percent. The MPC will begin its meeting on March 6 and announce its decisions at noon the following day. It comes amid a continuing debate sparked by incoming BOE Governor Mark Carney about tools such as forward guidance and the flexibility of inflation targeting.
Paul Fisher, one of the MPC members who voted for more QE in February, proposed this week a more prolonged period of asset purchases at a slower pace. His program, guided by the economic outlook, has echoes of the U.S. Federal Reserve’s policy of linking stimulus to thresholds. Fisher also said the BOE’s remit is flexible enough to allow officials to continue to provide stimulus even with inflation above their target.
Markit’s manufacturing index dropped to 47.9 in February from 50.5 in January, where a reading below 50 indicates contraction. A services index next Tuesday may fall to 51 from 51.5, economists said in a survey.
The pound fell against the dollar after the factory data, weakening through $1.50 for the first time since July 13, 2010.
“The MPC will vote to restart QE at the March meeting -- or if not then, soon after -- unless the upcoming services PMI rises surprisingly sharply,” said Michael Saunders, an economist at Citigroup in London. “QE’s effectiveness would be enhanced if the MPC also indicate that they intend to expand QE further unless the economy improves markedly.”
Still, some economists are skeptical that the BOE will expand the bond-purchase program next week.
“The MPC seems to be divided whether the stimulus should come from more gilt purchases or measures aimed at a specific target,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “We think a majority of the MPC is in favor of the latter, given doubts about the effectiveness of more gilt purchases.”