Bloomberg News

BOE Officials May Edge Closer to Resuming Bond Purchases

October 06, 2011

(Updates with pound in sixth paragraph, Deutsche Bank forecast in 10th.)

Oct. 6 (Bloomberg) -- Bank of England officials may edge close to reactivating emergency bond purchases today as they gauge whether budget cuts and a European debt crisis warrant the first increase in stimulus in two years.

HSBC Holdings Plc’s Janet Henry and Societe Generale SA’s Brian Hilliard are among 11 economists predicting an expansion of bond purchases. The rest in a Bloomberg News survey of 32 forecasts say that policy makers led by Mervyn King will refrain from adding stimulus for now. Barclays Capital economist Simon Hayes says the bank will restart so-called quantitative easing when officials have new forecasts next month.

“It’s a question of when, not if,” said Neil Mackinnon, an economist at VTB Capital in London and a former U.K. Treasury official, who predicts the bank will buy bonds today. “Markets and the global economy are in a precarious state and the situation has escalated. Whether central banks have the luxury of waiting is very debatable.”

Policy makers Ben Broadbent and David Miles have indicated they are moving closer to joining Adam Posen’s call to resume QE as Chancellor of the Exchequer George Osborne says he will approve any request from the bank to add to stimulus. Conflicting reports this week have complicated the decision by showing that while services and manufacturing unexpectedly strengthened last month, the economy grew less than initially estimated in the second quarter.

Economic Slowdown

The central bank, which bought 200 billion pounds ($309 billion) of bonds in a program that ended in early 2010, will announce its decision at noon in London. It will also hold the benchmark interest rate at a record low of 0.5 percent, according to all 53 economists in a separate survey. The MPC last voted for an increase in the plan in November 2009.

The pound was up 0.2 percent at $1.5484 as of 11:15 a.m. in London. It has fallen about 3 percent against the dollar in the past month.

Gross domestic product rose 0.1 percent from the first quarter, lower than the 0.2 percent previously published, data yesterday showed. Consumer spending plunged 0.8 percent, the most since the first quarter of 2009.

The Treasury, reacting to the downward revision to growth, said recent survey data are “consistent with continued expansion” in the economy. Services growth unexpectedly accelerated in September and there was a surprise expansion in manufacturing, reports from Markit Economics showed this week. Services companies grew 0.2 percent in July, the Office for National Statistics said today, while Halifax said that U.K. house prices fell for a second month in September.

‘Prone to Action’

The economic outlook means the Monetary Policy Committee will be “more prone to action,” John Gieve, a former member of the MPC, told Bloomberg Television. “At the very least, I’d expect the bank to say they are ready to restart QE if this continues and Europe doesn’t get its act together.”

The British Chambers of Commerce said yesterday the central bank should increase its bond plan by 50 billion pounds. Deutsche Bank AG economist George Buckley said he sees a 40 percent chance of policy makers adding to stimulus today.

Fed, ECB

The U.S. Federal Reserve responded to the economic slowdown last month by adopting so-called Operation Twist, replacing $400 billion of Treasuries in its portfolio with longer-term securities in a move aimed at further reducing borrowing costs and lowering unemployment. Central banks in Brazil and Israel have cut their benchmarks.

The European Central Bank is forecast to keep its benchmark rate at 1.5 percent in Berlin today. The decision will be announced at 1.45 p.m. local time after the last policy meeting chaired by Jean-Claude Trichet before he is succeeded by Mario Draghi.

In Britain, the economy has struggled to recover from the recession, with the economy barely growing over the past year. The International Monetary Fund cut its 2011 and 2012 U.K. growth forecasts last month to 1.1 percent and 1.6 percent from 1.5 percent and 2.3 percent, respectively.

MPC members have said resuming bond purchases would be their preferred option if more stimulus is required, minutes of the September meeting showed, after discussing measures including cutting the benchmark rate and changing the maturity of its current bond holdings. Minutes of today’s meeting will be published on Oct. 19.

‘Catastrophic Risk’

As the global recovery cools and Europe’s debt crisis threatens to spread to Italy and Spain, equity markets have suffered. The Stoxx Europe 600 Index fell 17 percent in the third quarter, while London’s FTSE 100 Index dropped 14 percent, the most since 2002.

U.K. Prime Minister David Cameron said on Oct 4 that European leaders must resolve the debt crisis without delay because it is holding back world growth, while U.S. Treasury Secretary Timothy F. Geithner warned last month that failure to combat the turmoil could lead to “cascading default, bank runs and catastrophic risk.”

“We are facing a real potential crisis in Europe,” Gieve said. “There is evidence credit conditions are tightening.”

European Union officials are working on plans to boost bank capital to contain the euro-region’s debt crisis, the IMF said yesterday. Leaders of the Group of 20 nations will meet in Cannes, France, on Nov. 3-4, which international finance chiefs see as the deadline for resolving the turmoil. The Bank of England publishes new quarterly economic forecasts Nov. 16.

--With assistance from Francine Lacqua in London. Editors: Fergal O’Brien, Andrew Atkinson

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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