BOE Seen Keeping QE on Hold as Economy Shows Signs of Recovery

The Bank of England will maintain its target for asset purchases next week after surveys indicated the recovery is gaining momentum, a survey of economists shows.

The nine-member Monetary Policy Committee led by Governor Mervyn King will keep the target for quantitative easing at 375 billion pounds ($582 billion), according to all but one of 44 economists in the Bloomberg News poll. The MPC will also keep its benchmark interest rate at a record-low 0.5 percent, another survey shows.

Services, the largest part of the economy, unexpectedly strengthened in April as new business rose, while manufacturing and construction shrank less than forecast, Markit Economics said this week. Those reports followed data on April 25 showing that gross domestic product increased 0.3 percent in the first quarter, averting a third recession since 2008.

“The encouraging outturn for the services index is a hopeful sign that the recovery is now genuinely under way,” said Nida Ali, an economist at the Ernst & Young Item Club in London. “Given the relatively strong run of economic indicators over the past few weeks, the chances of any additional QE being authorized this month now look slim.”

The MPC will announce its decisions at noon on May 9 following its two-day meeting. Policy makers will have new projections for economic growth and inflation, which they will publish in the quarterly Inflation Report on May 15.

MPC Minority

The MPC has split in recent months on the need for more QE, with King and two others pushing for a 25 billion-pound increase. While Chancellor of the Exchequer George Osborne gave policy makers more flexibility in March to support the recovery, the improving economic data may weaken the minority’s case.

The purchasing managers index for services rose to 52.9 in April, the highest in eight months, from 52.4 in March, Markit and the Chartered Institute of Purchasing and Supply said yesterday in London. Readings above 50 indicate expansion. The construction index increased to 49.4 from 47.2, while the manufacturing gauge advanced to 49.8 from 48.6.

“The trio of good PMIs this week largely draw the line under the discussion over any more QE from the MPC next week,” said David Tinsley, an economist at BNP Paribas SA in London. “It was going to be pretty hard for the three voting for more asset purchases to convince the rest in any case, with a GDP print for the first quarter very much in line with February Inflation Report forecasts.”

The pound rose 0.2 percent against the dollar to $1.5559 after the services report on May 3. Bonds declined, sending the 10-year gilt yield up 10 basis points to 1.73 percent. The yield earlier rose as much as 12 basis points, the biggest intraday increase since Feb. 13. News that the U.S. jobless rate unexpectedly declined to a four-year low also weighed on gilts by weakening demand for safer assets.

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