BOE Refrains From Expanding Stimulus as Recovery AssessedScott Hamilton and Jennifer Ryan
The Bank of England left its stimulus program unchanged as officials assess recent signs of strength in the economy after it returned to growth in the first quarter.
Armed with new quarterly forecasts, the nine-member Monetary Policy Committee kept the target for asset purchases at 375 billion pounds ($584 billion), as forecast by all but one of 44 economists in a Bloomberg News survey. The decision followed BOE Governor Mervyn King’s penultimate meeting before he is replaced by Bank of Canada chief Mark Carney on July 1.
Some surveys suggest the recovery is building momentum after the economy grew in the first quarter, and the National Institute for Economic and Social Research estimated today that gross domestic product rose 0.8 percent in the three months through April. Still, strains in the euro area that prompted a European Central Bank interest-rate cut last week might support the case for further stimulus.
“The U.K. data flow over the past month has been pretty good,” said James Knightley, an economist at ING Bank NV in London. “We still feel that the recovery will be slow and the U.K. remains vulnerable to external shocks, particularly from the euro zone, so there is the potential for further stimulus.”
A report earlier showed U.K. industrial production increased 0.7 percent in March, more than economists predicted. Manufacturing rose 1.1 percent, also exceeding forecasts.
The pound slipped 0.2 percent to $1.5506 as of 3:37 p.m London time, having earlier risen as much as 0.4 percent. The yield on the 10-year gilt was little changed at 1.77 percent.
The central bank also kept its key interest rate at a record low of 0.5 percent, which was forecast by all 52 economists in a separate poll. Minutes of the meeting, showing how officials voted, will be published May 22.
The British Chambers of Commerce said the BOE was right not to expand stimulus again and that it should use other measures to support business lending.
“Adding to QE would only provide marginal benefits for the economy, while increasing the risks of higher inflation and bubbles,” BCC Chief Economist David Kern said in a statement.
King and Markets Director Paul Fisher had voted for a 25 billion-pound increase since February, joining David Miles in a push for more quantitative easing.
Since then, the economy has shown some signs of strength. Activity at services businesses improved in April, while slumps in manufacturing and construction eased, according to surveys last week. The FTSE 100 Index has risen 12 percent this year and reached its highest in more than five years today.
Those recent signs may have reinforced the position of the six-member majority on the MPC that has been resisting King’s push to expand QE on concern that such a move may stoke inflation expectations. Consumer-price growth was 2.8 percent in March, above the BOE’s 2 percent target.
Nevertheless, with the economic recovery not yet assured, the BOE and the U.K. Treasury expanded their Funding for Lending Scheme last month to boost credit to small- and medium-sized businesses. British Prime Minister David Cameron said today that the FLS has been “effective.”
In its statement, Niesr said its GDP estimate was inflated by the weak level of output in January. “Underlying growth is weaker than the headline figure suggests,” it said.
Other major central banks are adding to stimulus. The Reserve Bank of Australia cut interest rates this week and Poland’s central bank lowered its benchmark yesterday.
The ECB cut its key rate to a record low of 0.5 percent on May 2 and extended a policy of unlimited bank lending to mid-2014 to help pull the economy out of a recession. The U.S. Federal Reserve said the previous day it will continue bond purchases until the labor market improves “substantially.”
The International Monetary Fund forecasts the U.K. economy will expand 0.7 percent this year, while inflation will average 2.7 percent. The U.S. will expand 1.9 percent, it said. The BOE will release new forecasts in its Inflation Report on May 15.
The forecasts might include a reduction in the outlook for the peak of inflation this year, according to BNP Paribas SA economist David Tinsley. In February, the BOE said that inflation would reach 3.2 percent in the third quarter.
At the same time, threats to the recovery remain. The euro-area economy, Britain’s biggest export market, will shrink 0.3 percent this year, according to the IMF. William Morrison Supermarkets Plc, the smallest of the U.K.’s four main supermarket chains, said today that it is “cautious on the economic environment and consumer spending.”
Chancellor of the Exchequer George Osborne, who says his strategy is “fiscal responsibility and monetary activism,” has laid the groundwork for Carney. He broadened the BOE’s remit to allow it more flexibility to add to stimulus and asked it to review the merit of forward policy guidance. Carney has said that central banks aren’t “maxed out.”
“Recent economic indicators have been more upbeat and the U.K. escaped the dreaded triple-dip recession, but economic growth remains far from ‘escape velocity’,” said Victoria Clarke, an economist at Investec Securities in London. “We see this as something Mr. Carney will push to achieve.”