Osborne Says U.K. Cuts Pave Way for ‘Monetary Activism’
September 07, 2011, 5:17 AM EDTBy Gonzalo Vina
(Updates with pound in fifth paragraph, Osborne’s comment on growth in seventh.)
Sept. 7 (Bloomberg) -- Chancellor of the Exchequer George Osborne said his five-year program to eliminate Britain’s budget deficit has provided space for the Bank of England to practise “monetary activism” to keep borrowing costs down.
The plan for the biggest cuts in public spending since World War II is “flexible enough” to withstand economic shocks even as growth struggles to gather momentum, Osborne said in a speech last night to Lloyd’s of London, the world’s oldest insurance market. He suggested government growth forecasts will be lowered.
The U.K. has “a plan for fiscal responsibility” that was introduced “so that monetary activism can allow interest rates to stay lower for longer,” Osborne said.
Goldman Sachs Group Inc. and Citigroup Inc. said two days ago the Bank of England may restart its quantitative easing program by buying bonds as early as this week as the economic recovery weakens and bank-funding costs increase. Governor Mervyn King needs permission from Osborne to do so.
The pound yesterday slipped below $1.60 for the first time since July 13 and was trading at $1.5998 as of 9:51 a.m. in London, up 0.4 percent on the day. Government bonds extended yesterday’s declines, pushing up yields. The 10-year gilt yield rose 5 basis points to 2.34 percent.
Osborne acknowledged the economy is expanding more slowly than predicted in March, suggesting the Office for Budget Responsibility may cut its forecast of 1.7 percent growth in 2011 when it publishes its economic and fiscal outlook Nov. 29.
Reappraisal
The Bank of England lowered its growth forecast last month to 1.5 percent from 1.9 percent and the average of independent forecasts compiled by the Treasury is for 1.3 percent.
“While we have all had to revise down our short-term expectations over recent weeks, the only people who should be fundamentally re-examining their view of the world are those who thought that this time was different,” Osborne said.
The central bank’s Monetary Policy Committee starts a two- day policy meeting today, a month after some members debated whether the economy needs more support. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Sept. 5 that conditions in the stock and bond markets are reminiscent of the financial crisis of late 2008, when Lehman Brothers Holdings Inc. collapsed, triggering a round of global stimulus.
‘Ahead of the Curve’
Osborne said the U.K. has been “ahead of the curve,” allowing borrowing costs to stay low relative to other European countries. The chancellor is due to meet International Monetary Fund Managing Director Christine Lagarde and other finance ministers from Group of Seven nations at the end of the week.
“We had an emergency budget last summer on our own terms - - not this summer on the market’s terms -- unlike many other countries,” Osborne said.
Concern that Europe’s debt crisis is worsening and global economic growth is slowing has sent Europe’s Stoxx 600 Index down 15 percent since the end of July. In the U.S., where the S&P 500 Index has fallen 9.2 percent, the slowdown prompted some Federal Reserve officials to favor “more substantial” action to aid growth at their Aug. 9 meeting.
The Bank of England bought 200 billion pounds ($319 billion) of government debt in a program that ended in early 2010. Adam Posen was the only policy maker to vote for further asset purchases at last month’s meeting, continuing a push he began in October 2010.
Osborne so far has refrained from expressing a view on whether the Bank of England should seek his permission to expand the program. Business Secretary Vince Cable called on the central bank in July to expand money supply if demand continues to falter.
--Editors: Eddie Buckle, Andrew Atkinson
To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net
To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net
