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Tags: boe | Bank-of-England | Stimulus | Hold | Panel | Standoff

Bank of England Stimulus on Hold for Now After Panel Standoff

Thursday, 07 October 2010 09:59 AM EDT

The Bank of England kept up emergency stimulus and left its interest rate at a record low as officials debate whether to join a global push to pump more aid into the world economy.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the target for bond holdings at 200 billion pounds ($319 billion), as forecast by all 36 economists in a Bloomberg News survey. The panel also kept the benchmark interest rate at 0.5 percent at its decision today in London.

Policy makers are split after Adam Posen called for more aid and Andrew Sentance campaigned to raise interest rates. Officials moved closer to adding stimulus in September and will debate it again in a month using new economic forecasts. By then, they will also have more details of public-spending cuts and the U.S. Federal Reserve’s asset-purchase plans.

Today’s decision “will be a lively meeting,” George Buckley, chief U.K. economist at Deutsche Bank AG in London, said in a telephone interview before the decision. “While most members will probably say we’re not willing to do more quantitative easing at the moment, it’s moving that way. We’ll certainly see a three-way split.”

The pound rose as much as 0.4 percent against the dollar after the decision and traded at $1.5979 as of 12:04 p.m. in London. The currency climbed from a five-month low against the euro and was at 87.41 pence per euro. The yield on the benchmark two-year government bond was up 3 basis points today at 0.642 percent.

Global Stimulus

The Bank of England’s rate decision was predicted by all 60 economists surveyed by Bloomberg News. All 52 analysts in a separate survey say the European Central Bank will keep its benchmark at 1 percent at 1:45 p.m. in Frankfurt as financial- market tensions complicate its exit from emergency measures.

Other central banks are already signaling they will inject more economic stimulus to shore up a flagging global recovery. The Bank of Japan this week established a 5 trillion-yen ($60 billion) fund to buy assets. Fed Chairman Ben S. Bernanke said on Oct. 4 that further asset purchases may help the U.S. economy. The Federal Open Market Committee’s next decision is on Nov. 3, the day before the Bank of England’s.

Reports today highlighted the extent of the Bank of England’s dilemma. While Lloyds Banking Group’s Halifax division said today that house prices plunged 3.6 percent last month, the most since records began in 1983, manufacturing data for August showed a 0.3 percent increase to the strongest level of factory output since November 2008.

Budget Squeeze

Spending cuts by Prime Minister David Cameron’s government threaten to weaken economic growth further. Cameron said yesterday that Britain needs to “face up to our financial responsibilities” by curbing the record budget deficit. Details of the planned expenditure squeeze are due on Oct. 20.

Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, said today it’s “cautious” on the outlook and that “trading conditions are likely to become more challenging.”

“From the last set of minutes it was clear that there was more than one member concerned about economic activity,” said Ian Kernohan, an economist at Royal London Asset Management in London. “But we see the economy muddling through. The monetary policy settings are as loose now as they need to be.”

Sentance has argued since June that the economy is strong enough for the Bank of England to begin a “gradual” withdrawal of stimulus by raising interest rates to tame inflation. Consumer prices rose an annual 3.1 percent in August, exceeding the government’s 3 percent limit for a sixth month, while a gauge of service company growth unexpectedly rose in September.

Posen’s View

Posen countered that view on Sept. 28, saying that “further easing should be undertaken” by purchases of gilts with newly created money. He added that officials should “not settle for weak growth out of misplaced fear of inflation.” The British Chambers of Commerce and Institute of Directors, both London-based business lobby groups, backed him.

Former policy maker David Blanchflower endorsed his view in an article for the New Statesman published today and said it was “likely” that the bank will add 50 billion pounds to its stimulus plan in November.

Other former policy makers disagree. Former Deputy Governor John Gieve told the London-based Times newspaper this week that “the likelihood is 70-30” that the recovery will continue. Kate Barker, who left the bank at the end of May, told CNBC last month that the case for more stimulus was looking “less certain.” Former finance minister Norman Lamont said yesterday he wouldn’t favor more bond purchases.

Quarterly Forecasts

The Bank of England’s panel will have new quarterly forecasts next month as they gauge if the economy needs more stimulus and whether further bond purchases can aid growth. Central bank officials estimate their stimulus actions so far have shaved 1 percentage point off bond yields.

“Both camps would acknowledge that the data are inconclusive,” Simon Hayes, an economist at Barclays Capital and a former Bank of England official, said before the decision. “We still need to see some more bad news on the real economy in order to see more quantitative easing.”

--With assistance from Jennifer Ryan and Scott Hamilton in London. Editors: Craig Stirling, Andrew Atkinson

To contact the reporter on this story: Svenja O’Donnell in London at [email protected]

To contact the editor responsible for this story: John Fraher at [email protected]

© Copyright 2024 Bloomberg News. All rights reserved.

The Bank of England kept up emergency stimulus and left its interest rate at a record low as officials debate whether to join a global push to pump more aid into the world economy. The nine-member Monetary Policy Committee, led by Governor Mervyn King, held the target for...
Thursday, 07 October 2010 09:59 AM
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