BOE Keeps QE on Hold as Officials Weigh More Radical ToolsScott Hamilton and Svenja O’Donnell
The Bank of England left its four-year-old bond-purchase program unchanged today as policy makers debate more radical measures to aid the recovery.
The Monetary Policy Committee led by Governor Mervyn King maintained its target for quantitative easing at 375 billion pounds ($565 billion). The decision was forecast by 29 of 39 economists in a Bloomberg News survey, with the remainder having predicted an expansion of at least 25 billion pounds. The pound rose after the announcement.
The division among economists followed a split MPC vote last month and comments from policy makers on possible tools from negative interest rates to a prolonged period of bond buying. The broadened discussion on how to help an economy that’s barely grown in the past two years comes as the BOE prepares for incoming governor Mark Carney, who has said that policy isn’t yet “maxed out.”
“The economy is not quite weak enough to justify more QE, or indeed other forms of monetary easing, just yet,” said Martin Beck, an economist at Capital Economics Ltd. in London. “But with fears that the economy will enter a triple-dip recession still very present, further action by the bank in the next month or two is likely.”
The pound erased its decline against the dollar after the BOE announcement. It traded at $1.5060 as of 12:48 p.m. in London, having earlier dropped to $1.4967, the lowest in more than 2 1/2 years. Gilts fell, pushing the 10-year yield up 4 basis points to 1.99 percent.
“The market had braced for a move,” said Alan Clarke, an economist at Scotiabank in London. “Our inclination would be that if the committee did not pull the trigger today, then it will only pull the trigger if the euro zone panic returns in a big way, or once the new governor arrives.”
The BOE also kept its key interest rate at a record-low 0.5 percent, where it has been since March 2009, the same month that QE began. The central bank will publish the minutes of today’s meeting on March 20. In February, King and two other MPC members were defeated in a push for more asset purchases.
In Frankfurt today, the ECB kept its key rate at a record-low 0.75 percent, as forecast by 56 of 61 economists surveyed by Bloomberg. President Mario Draghi will hold a press conference at 2:30 p.m.
While the BOE didn’t expand stimulus, it will still be buying bonds this month as it reinvests 6.6 billion pounds from the maturing March 2013 gilt, which it had bought under the QE program. Announcing the reinvestment details, it said it will hold three auctions a week from March 11, each with an initial size of 1.1 billion pounds.
With Carney’s arrival in July spurring a debate on the BOE’s remit, the Treasury said today Chancellor of the Exchequer George Osborne will consider the bank’s 2 percent inflation target in his budget this month as he does every year. The Financial Times reported that Osborne may announce a change to the existing monetary framework in the budget.
Inflation was 2.7 percent in January, and the MPC has said its current mandate is already flexible and they plan to “look through” the price surge to aid the economy. Deputy Governor Paul Tucker said this is “consistent” with the MPC’s remit to “avoid derailing the recovery.”
The BOE has forecast “weak” growth in the near term, and recent reports have failed to fully dispel concerns the economy is heading for a triple-dip recession. While services strengthened in February, manufacturing and construction shrank.
John Lewis Partnership Plc, owner of the U.K.’s largest department-store chain, said today it expects sales to grow this year, albeit at a slower pace than in the last fiscal year.
At the same time, the recovery is under pressure from the government’s austerity measures. Prime Minister David Cameron said today he’ll stick to his economic plans.
“While some would falter and plunge us back into the abyss, we will stick to the course,” Cameron said.
With the government refusing to ease its fiscal squeeze, that’s left the BOE as the main support for the economy. At their last meeting, the MPC discussed cutting the key interest rate from 0.5 percent, purchasing assets other than gilts and changing the remuneration on bank reserves. While Deputy Governor Charles Bean said talk of negative interest rates is part of “blue-skies thinking,” the broadening MPC discussion has raised expectations that more stimulus is coming.
King said yesterday that results from the Funding for Lending Scheme, introduced last summer to boost credit, were “disappointing.” Data this week showed lending by Lloyds Banking Group Plc and Banco Santander SA fell in the fourth quarter.
The British Chambers of Commerce cut its 2013 economic growth forecast today to 0.6 percent from 1 percent. Still, it said more QE “would only provide marginal benefits.”
“The MPC should do more to support a revival in business lending, both by making better use of the existing QE programme, and by using measures other than QE alone, said BCC Chief Economist David Kern.