BOE Weighs Opening its Stimulus Toolbox as Economists SplitSvenja O’Donnell
Bank of England policy makers will today consider restarting asset purchases and a range of other measures as they redouble efforts to revive Britain’s economy.
While a majority of economists predict no change in the 375 billion-pound ($564 billion) quantitative-easing target, 11 out of 39 surveyed by Bloomberg News forecast an increase. The division reflects uncertainty prompted by last month’s split on the Monetary Policy Committee, when Governor Mervyn King and two others were defeated in a push for a 25 billion-pound expansion.
That vote and a series of comments since the last meeting have created suspense on the next move as officials consider how to help an economy that’s barely grown in the past two years. With incoming governor Mark Carney suggesting that policy isn’t yet “maxed out,” Deputy Governor Paul Tucker has said he wants to discuss negative interest rates and Markets Director Paul Fisher raised the idea of a prolonged period of bond buying.
“A majority of the MPC have reached the point where they agree that the economy needs more stimulus,” said Michael Saunders, chief western Europe economist at Citigroup Inc. in London, who predicts a vote to restart bond purchases. “Now they have to agree on how to do it.”
The BOE will also keep its key interest rate at a record low of 0.5 percent, according to another survey. It will announce its decisions at noon in London.
The pound declined to as low as $1.4967 before the announcement, the weakest since July 13, 2010. It traded at $1.4995 as of 9:07 a.m. in London.
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.
“They’ve got themselves in a bit of a corner,” said David Tinsley, an economist at BNP Paribas SA in London and a former BOE official. “They’ve done nothing to roll back on the expectation in the market that more easing is coming. It’s turned the meeting into a bit of an event risk.”
King said yesterday that results from the Funding for Lending Scheme, introduced last summer, were “disappointing.” Data this week showed lending by Lloyds Banking Group Plc and Banco Santander SA fell in the fourth quarter.
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 growth accelerated in February, manufacturing and construction contracted. U.K. tour operator Thomas Cook Group Plc said yesterday it plans to cut 2,500 jobs and shut almost 200 stores.
The economy is also under pressure from Chancellor of the Exchequer George Osborne’s austerity measures. He pledged to press on with his budget plans after Moody’s Investors Service stripped Britain of its top credit rating last month.
Separately, the ECB will keep its key rate at a record-low 0.75 percent, according to 56 of 61 economists surveyed by Bloomberg. Five predict a reduction to 0.5 percent. The ECB will announce its decision at 1:45 p.m. in Frankfurt and President Mario Draghi holds a press conference 45 minutes later.
In Ottawa yesterday, Carney’s Bank of Canada kept its benchmark at 1 percent and softened language about tighter policy for the second meeting in a row, saying inflation will “remain low in the near term.”
That’s in contrast to the situation Carney will inherit in July in the U.K., where inflation may remain above the BOE’s 2 percent target for the next two years. MPC members have said they will “look through” the price surge to aid the economy.
The U.K. Treasury said Osborne will consider the BOE’s inflation target as he does every year, as policy makers debate an overhaul of central bank’s remit. The Financial Times said today Osborne may announce a change to the existing monetary framework in his budget on March 20. A Treasury spokesman played down the report, saying it is no more than a reflection of the public debate on the subject.
The BOE will also announce today what bonds it plans to buy with the 6.6 billion pounds it will get from the redemption of the March 2013 gilt. It announced it would reinvest the funds after its meeting last month.
Among economists forecasting more stimulus today, Saunders predicts a 25 billion-pound increase in QE. He sees purchases rising to 450 billion pounds this year and the introduction of new measures by the BOE in the coming months.
Brian Hilliard, chief U.K. economist at Societe Generale in London, said looser policy won’t happen today and it may take a change in leadership to spark sweeping new tools.
“If we’re looking at radical options, I don’t think they’re going to be seriously considered until Carney arrives,” he said. “The question is what you do in the meantime and what you do is QE. More easing is likely before long.”