Bloomberg News

Fisher Says BOE Move Justified as Economy May Be Shrinking

November 01, 2011

(Updates with pound decline in seventh paragraph.)

Oct. 27 (Bloomberg) -- Bank of England Markets Director Paul Fisher said expanding monetary stimulus by 75 billion pounds ($120 billion) this month was the minimum amount needed to shore up an economy that may already be shrinking.

“There was sufficient downward momentum in the U.K. economy to justify 75 billion,” Fisher, 53, said in an interview in London yesterday, referring to the bank’s Oct. 6 decision to buy more bonds. “Even if we get a silver bullet solution to Europe, I still thought we needed to do something like that to head off the risk of a slowdown.”

Policy makers expanded their asset-purchase plan for the first time since 2009 as Europe’s debt crisis and Britain’s budget squeeze threatened growth. Fisher said there may be a “50-50” chance the economy will contract in the fourth quarter, even if euro-area officials succeed in containing the region’s turmoil. European leaders persuaded bondholders to take 50 percent losses on Greek debt after talks in Brussels that concluded early this morning.

Fisher said U.K. growth may be “not much better than flat” in the fourth quarter and there is a “significant” chance of another U.K. recession.

“Looking at the fourth quarter for example, at best it seems to be flat, could easily have negative growth, so the technical outcome of two quarters of negative growth in a row could quite easily come about,” he said in a separate Bloomberg Television interview. “But hopefully we have spotted it coming and we’ve taken action which will help prevent it.”

“I voted for 75 because I was pretty sure we’d have to do at least 75,” he said.

Euro Summit

The pound fell against all but two of its 16 major counterparts today. Against the euro, it weakened 0.7 percent to 87.64 pence as of 11:26 a.m. in London. Bonds fell, pushing the 10-year gilt yield up 7 basis points to 2.53 percent.

At a summit in Brussels, euro-area officials announced a new plan to keep contagion from Greece from spreading through the region, the destination for half of Britain’s exports. They boosted the firepower of the region’s rescue fund to 1 trillion euros ($1.4 trillion), agreed a bank recapitalization and got a commitment from Italy on its debt.

Along with “truly dreadful” financial-market conditions, Fisher said there was a “real risk of deflation coming back onto the agenda” when policy makers met earlier this month.

QE Impact

While there was a “significant chance” of a recession, the new stimulus may have made a “fairly significant” contribution to stemming the deterioration, Fisher said in a separate interview with Bloomberg Television. Signs of improvement could lead policy makers to suspend purchases.

“If we get a couple of months in and things suddenly look a lot brighter, we can just stop,” he said. The 75 billion pounds is “a sensible place to start” and once completed, officials can “then decide whether we need to do more.”

Policy makers expanded stimulus as inflation accelerated to 5.2 percent in September, more than twice the central bank’s target. While the bank expects the rate to fall, “we’re very uncomfortable with inflation being where it is,” Fisher said.

In addition to the impact on exports from cooling global growth, domestic demand is being restrained by the government’s efforts to reduce the budget deficit.

“Having tight fiscal policy and loose monetary policy is almost certainly the right combination,” Fisher said, adding that movements in bonds and the pound indicate investor confidence in the U.K. The 10-year gilt yield fell to 2.18 percent on Sept. 12, the lowest since at least January 1989, when Bloomberg started collecting the data.

Lending Boost

“If people did not have confidence in the U.K., you would not see gilt yields as low,” and “I take some comfort from the stability of sterling,” Fisher said. “The U.K. is being seen at the moment as a relatively safe haven.”

He also said trading shows “nothing untoward” in investors’ expectations for consumer prices. The yield gap between five-year inflation-linked bonds and standard notes of similar maturity, a gauge of market inflation expectations, has dropped 19 basis points this year to 2.34 percentage points.

While the Bank of England’s expansion of bond purchases will help support small businesses by stoking demand in the economy, officials at the central bank are working with the government to try to improve access to credit, Fisher said. Governor Mervyn King was challenged by U.K. lawmakers on Oct. 25 that the asset program doesn’t do enough to improve lending to small- and medium-sized businesses.

Fisher said he agreed with King that the incentives for banks to lend need to be improved, and that it would also be helpful to reduce lending costs.

“I talk to individual businesses, and a lot of them say you can get credit, but the cost is prohibitive,” he said.

“We’ve looked at this and it’s very hard to think of something that we could actually do to support the direct provision of credit,” he said. “If there’s a role for the bank to play in that, we’d be very happy to do so.”

--With assistance from Linda Yueh, Joanna Starritt and Paul Dobson in London. Editors: Fergal O’Brien, Simone Meier

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; 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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