BOE may back off stimulus exit as UK economy stumbles

LONDON - Bank of England Governor Mervyn King is getting pushed back toward the printing presses as central banks in the United States and Japan turn their focus on more bond purchases to defend the global recovery.

King is battling to keep the economy from sliding back into recession as Prime Minister David Cameron prepares the biggest public-spending squeeze since World War II. Pressure to do more is building after the Federal Reserve signaled in the past two weeks it may buy more assets to bolster US growth, while the Bank of Japan on Tuesday pledged further purchases.

"The debate has been shifting toward the argument in favor of loosening, and it's likely we'll see another step in that direction at this meeting," said Jonathan Loynes, chief European economist at Capital Economics Ltd in London. "When we see the gory details of the spending cuts it may knock confidence and that increases pressure on policy makers."

The danger for the Bank of England is that more easing by US and Japanese authorities may strengthen the pound relative to their currencies, further undermining the recovery.

The pound has already risen 10 percent against the dollar since falling to a 14-month low in May.

Adding to evidence of an economic slowdown, mortgage lender Halifax said Thursday that UK house prices dropped in September, the most since at least 1983.

The pound fell to 88.05 pence per euro after the report, the lowest since May. Against the dollar it dropped 0.3 percent to $1.5869.

Policymakers have held their bond-purchase plan at 200 billion pounds ($318 billion) since February and the benchmark interest rate at a record low of 0.5 percent since March 2009.

All but one of 36 economists in a Bloomberg News survey expect no change in the target for asset purchases Thursday, and all 60 in a separate poll see no change in the key rate.

The bank was due to announce the decision at noon in London on Thursday and minutes of the decision will be published on Oct 20.

The European Central Bank will also keep its rate at 1 percent, another survey shows. It was due to announce its decision in Frankfurt 45 minutes after the Bank of England.

A three-way split may emerge on the UK central bank's nine-member panel Thursday, with Adam Posen arguing more action is needed to save the economy from permanent damage.

That clashes with calls from his colleague Andrew Sentance for the bank to raise the benchmark interest rate to tame inflation that's held above the 2 percent target since December.

Housing plunge

The spending cuts, which will be detailed by Chancellor of the Exchequer George Osborne on Oct 20, may hurt a recovery that's already showing signs of cooling from the fastest pace in nine years in the second quarter. UK house prices fell 3.6 percent in September from a month earlier, Halifax said. Manufacturing grew the slowest in 10 months in September and jobless claims rose for the first time in seven months in August.

Posen said on Sept 28 that "subject to further debate, I think further easing should be undertaken" by purchases of gilts with newly created money. Officials should "not settle for weak growth out of misplaced fear of inflation". The Institute of Directors and British Chambers of Commerce, two London-based business lobbies, backed the call.

"There is a chance that Posen might be able to secure a majority to vote with him on QE (quantitative easing)," former policy maker David Blanchflower wrote in an article for the New Statesman. "But more likely is that the MPC (Monetary Policy Committee) will agree to an additional 50 billion pounds worth of asset purchases at its November meeting, when it will produce its latest forecast."

'Virtually zero'

Other central banks are already moving toward looser policy. US Federal Reserve Board Chairman Ben S. Bernanke said Monday the bank's first round of large-scale asset purchases improved the economy and that further buying may help more. The Bank of Japan this week cut the benchmark overnight interest rate and pledged to hold it at "virtually zero" until deflation risks subside.

"If it becomes clear that we expect a negative quarter of growth, or close to zero, that may be the trigger for the BOE to do more," said Hetal Mehta, an economist at Daiwa Capital Markets Europe Ltd in London and a former UK Treasury official.

Consumer prices rose an annual 3.1 percent in August, above the government's 3 percent upper limit. King said in August price growth will slow to "close to, or a little below" the 2 percent target in the medium term.

Higher rates?

Sentance has argued that the recovery is strong enough to withstand higher interest rates, though none of his colleagues on the panel have so far joined his push.

Economists including Simon Ward at Henderson Global Investors in London, say the government's plan to increase value-added tax in January may help keep inflation above the bank's goal.

"I'm not predicting more quantitative easing because the short-term inflation outlook has deteriorated," he said.

Bloomberg News

(China Daily 10/08/2010 page14)