BoE keeps bond stimulus unchanged to aid recovery

The Bank of England maintained its emergency bond-purchase plan and left its benchmark interest rate at a record low to support an economic recovery that is showing signs of stalling.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the target for bond holdings at £200 billion ($308 billion), as forecast by all 31 economists in a Bloomberg News survey. The bank kept the key interest rate at 0.5 per cent.

Britain’s recovery is starting to flag after the economy expanded at the fastest pace in almost a decade in the second quarter. Services, manufacturing and construction faltered in August and policymakers have said growth might lose steam, as the government implements the biggest public spending cuts since World War II and the global economy cools.

“The minutes will show they’ve given more serious consideration to doing more quantitative easing,” Vicky Redwood, an economist at Capital Economics in London and a former Bank of England economist, said in a telephone interview. “They would have had more discussion on the idea that the economy needs more support given the weakening data. But I think they probably want to wait to see if it’s sustained.”

The central bank’s interest-rate decision was predicted by all 56 economists in a Bloomberg News survey.

UK gilts stayed lower after the decision, with the 10- year government bond yield up 4 basis points on Thursday at 3.02 per cent. The pound also stayed lower against the dollar, down 0.6 per cent at $1.5404 as of 12:16 pm in London.

‘Fragile’ economy
The sustainability of Britain’s economic recovery is dividing the MPC. While Andrew Sentance has voted for an increase in interest rates for the previous three months, arguing economic conditions have improved and inflation expectations have become dislodged, Deputy Governor Charles Bean says the economy remains “fragile” and may require further policy easing.

The London-based National Institute of Economic and Social Research said yesterday that UK economic growth slowed in the three months through August and would “continue to decelerate.”

While officials say the bond-purchase programme has aided growth by shaving one percentage point off government bond yields, it has so far failed to cement the recovery. Economists including Alan Clarke at BNP Paribas in London say the weakening data point to a further easing of policy. He sees policymakers agreeing to a “second wave” of stimulus early next year.

Inflation risk
At the same time, inflation was 3.1 per cent in July, above the government’s three per cent upper limit. That required King to write to the Treasury to explain how he planned to bring it under control. The governor said in the letter published August 17 that the Monetary Policy Committee’s central view is that inflation would be “close to, or a little below” its two per cent target in the medium term.

The deteriorating economic outlook has pushed other central banks toward expanding stimulus again. The Bank of Japan said on September 7 there is “uncertainty about the future, especially for the US” The Reserve Bank of Australia also singled out the US this month, saying growth there looks “weaker” in the second half.

‘Challenging’ market
In the UK, growth may be curbed by the government’s efforts to reduce the record budget deficit. Chancellor of the Exchequer George Osborne will detail £61 billion of spending reductions on October 20. Home Retail Group, the owner of Argos catalog stores in Britain, said on Thursday the market remains “challenging.”

“It’s unlikely other members will be persuaded to join calls for rate increases,” Hetal Mehta, an economist at Daiwa Capital Europe in London and a former UK Treasury official, said in a telephone interview before the decision. “At this stage Sentance himself will be wondering, given recent developments, whether his outlook for tightening is justified.”

The government spending cuts prompted the Bank of England to trim its growth forecasts last month. King also has warned that a slowdown in the euro-area economy will impact the UK. The central bank now predicts growth may peak at a three per cent annual pace instead of the 3.6 per cent rate forecast in May.

“It’s a bit worrisome, but I think what you see now is just a soft patch,” Joost Beaumont, an economist at ABN Amro in Amsterdam, said in a telephone interview before the decision was announced. “I don’t believe that the fiscal consolidation measures will put the economy back into a double dip. It’s a very difficult call at the moment and therefore the MPC will remain in a wait-and-see mode.”