BOE Maintains QE as Inflation Concerns Override New FreedomScott Hamilton
Bank of England policy makers kept their stimulus program on hold as concern about dislocating inflation expectations overrode new freedoms given by a change to their remit.
The nine-member Monetary Policy Committee led by Governor Mervyn King maintained the target for asset purchases at 375 billion pounds ($565 billion) in London today, a move forecast by 34 of 37 economists in a Bloomberg News survey. The decision may mark a third consecutive defeat for King if he kept up his push for a 25 billion-pound increase.
Today’s meeting was the first since Chancellor of the Exchequer George Osborne expanded the MPC’s flexibility, broadening its capacity to ease policy even with above-target price gains. Still, a report today showed services unexpectedly strengthened in March and some MPC members have raised concern more stimulus could unhinge confidence in their inflation commitment.
“Inflation is likely to remain at elevated levels in coming months,” said Joost Beaumont, an economist at ABN Amro Holding NV in Amsterdam, who forecasts no further QE. “Meanwhile, the economy is likely to emerge from a triple dip, starting a modest but sustained recovery. The economy would need to take a turn for the worse before a majority of the MPC will vote for more gilt buying.”
The MPC also left its benchmark interest rate at a record low of 0.5 percent, where it has been since March 2009. That decision was predicted by all 50 economists in a separate survey of economists. The central bank will publish the minutes of today’s meeting on April 17.
The pound remained lower against the dollar after the announcement and was trading at $1.5117 as of 12:55 p.m., down 0.1 percent. It’s fallen about 7 percent this year.
In Frankfurt, the European Central Bank kept its benchmark rate at a record low 0.75 percent, in line with the median of 56 economist estimates in a survey. President Mario Draghi will hold a press conference at 2.30 p.m. local time.
The Bank of Japan decided today to increase monthly bond purchases to 7 trillion yen ($73 billion) in a bid to reach 2 percent inflation in two years. At the first meeting led by new Governor Haruhiko Kuroda, it also temporarily suspended a cap on bond holdings and dropped a limit on the maturities of debt it buys. The central bank set a two-year horizon for achieving the price goal under a “new phase of monetary easing.”
The BOE will have a new governor, Mark Carney, in three months. In advance of that, Osborne announced on March 20 that he will give the MPC more leeway to meet its 2 percent inflation target amid strains in the economy. He also asked the BOE to assess the benefits of forward guidance.
The remit change “hasn’t altered the outlook for monetary policy,” ABN’s Beaumont said. “The BOE seems more inclined to implement more targeted measures to stimulate the economy.”
The economy is showing limited signs that it has gathered momentum after shrinking in the fourth quarter. While services growth accelerated to the fastest pace in seven months in March, according to Markit Economics, manufacturing and construction both shrank. The combined gauges indicate gross domestic product rose just 0.1 percent in the first quarter, Markit said. The official GDP data is due on April 25.
King said last month that more stimulus through asset purchases would help foster a nascent recovery and that turmoil in the euro area had hurt confidence. A report today showed euro-region services contracted more than initially reported last month. Compass Group Plc, the world’s largest catering group, said conditions across Europe “remain difficult.”
Even with the weak U.K. economy, inflation remains a concern for the BOE. It accelerated to 2.8 percent in February - - above the MPC’s 2 percent target -- and the rate is forecast to increase further in the coming months.
The pound and its impact on inflation appeared prominently in the minutes of the MPC’s March meeting. The majority who voted against more stimulus last month said such a move might lead to an “unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.”
Sterling is the second worst performer this year among 10 developed-market currencies after the yen, according to Bloomberg Correlation-Weighted Indexes.
The British Chambers of Commerce said this week that the economy will avoid another recession and the pound’s decline will help boost exports. Its gauges of domestic and foreign demand at manufacturers and services companies all rose last quarter, with the export measures close to a record.
The services index points to “faint signs of life in the economy,” said Martin Beck, an economist at Capital Economics Ltd. in London. “But with any expansion at all in the first quarter still touch and go, we doubt the committee’s inaction will last too long.”