Bloomberg News

King’s Stance on U.K. Rate Aided by Fisher Caution on Recovery

June 09, 2011

June 9 (Bloomberg) -- Bank of England Governor Mervyn King’s push to keep interest rates at a record low may have strengthened this month as his top official for financial markets leads a defense against advocates for an increase.

Paul Fisher said last week he wants to be sure the economy is over its “soft patch” before the key interest rate is increased and that officials who share his view should be more vocal. The nine-member Monetary Policy Committee, led by King, held the key rate at 0.5 percent today, as forecast by all 55 economists in a Bloomberg News survey.

Investors have pushed back bets on the first rate increase to next year after factory and services growth slowed last month and data showed consumer spending plunged in the first quarter. The MPC meeting is the first since the departure of Andrew Sentance, who led calls for higher rates as inflation accelerated to more than double the bank’s 2 percent target.

“It’s clear that the doves seem to have the upper hand at the moment,” said Brian Hilliard, an economist at Societe Generale SA in London and a former Bank of England official. “King’s position is a bit more comfortable than a few months ago because of those concerns about growth and the market is scaling back its rate expectations.”

The bank also left its bond-purchase program at 200 billion pounds ($328 billion), as predicted by 35 economists in a separate poll.

The pound rose 0.1 percent to $1.6425 as of 12:45 p.m. in London. The yield on the two-year benchmark government bond was little changed at 0.85 percent.

ECB Decision

The European Central Bank, whose policy makers are meeting in Frankfurt, kept its benchmark interest rate unchanged at 1.25 percent after raising it by a quarter percentage point in April.

U.S. Federal Reserve Chairman Ben S. Bernanke said earlier this week that stimulus is still needed to boost a “frustratingly slow” recovery. The Fed said in its Beige Book yesterday that the economy expanded at a “steady pace” in most districts, while slowing in four of 12 regions.

In the U.K., investors are betting on a quarter-point rate increase in April, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. Less than a month ago, they were betting on November 2011.


Deputy Governor Charles Bean voiced his support for the Bank of England’s current policy on May 19, saying that a “temporary” period of above-target inflation is acceptable if officials need to aid the economy.

Fisher backed Bean’s view, questioning whether it would be right to risk the recovery “just so we could be more certain of keeping our credibility?” He said he spoke up as “those of us in the majority” are “not out there quite as much giving a clear steer of what our view is.”

Fisher also said he would consider adding to the bond program if the economy took a “sudden downturn.” Adam Posen has voted for more bond purchases since October, the only MPC member to favor such a move.

Sentance, Martin Weale and Chief Economist Spencer Dale have taken the opposite view. Dale, who has voted for a quarter- point rate increase since February, said last month that while he’s “not confident about the strength of the recovery,” he is “even more worried about inflation.” Vocalink said today that annual wage growth in the three months through May was 1.8 percent, the fastest since August 2009.

Sentance, who began calling for higher rates a year ago and sought a 50 basis-point increase since February, was replaced by Goldman Sachs Group Inc. economist Ben Broadbent on June 1. Minutes of today’s decision will be published on June 22.

Consumer Weakness

“I don’t suppose the hawks will throw in the towel completely just yet, but Andrew Sentance has now left so that has weakened that camp,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “In the foreseeable future, it’s more likely for the MPC to swing toward a more dovish sentiment given the tone of the data.”

While the economy grew 0.5 percent in the first quarter, investment and consumer spending slumped the most in almost two years. Manufacturing expanded at the slowest pace in 20 months in May and services grew the least since February, according to Markit Economics Ltd., which said the data indicate economic growth this quarter may not exceed 0.3 percent.

JPMorgan Chase & Co. and ABN Amro Bank NV responded to signs of cooling growth by pushing back their forecasts for the first U.K. rate increase. JPMorgan now sees the bank raising borrowing costs in November compared with a previous prediction of August, while ABN Amro projects no move until 2012.

“The past few weeks have seen a raft of disappointing data,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe who forecasts no change in rates this year. “Although near-term inflation is still a concern,” once the increases in sales tax and commodity prices “fall out of the annual calculations, it is likely to drop close to the 2 percent target next year.”

--With assistance from Mark Evans, Harumi Ichikura Jennifer Ryan and Svenja O’Donnell in London. Editors: Fergal O’Brien, Simone Meier

To contact the reporter on this story: Scott Hamilton in London at

To contact the editor responsible for this story: Craig Stirling at

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