Already a Bloomberg.com user?
Sign in with the same account.
(Updates with South African central bank decision in eighth paragraph.)
Nov. 10 (Bloomberg) -- The Bank of England maintained its target for asset purchases as policy makers gauged the capacity of their second round of stimulus to ward off the danger posed by Europe’s debt crisis.
The nine-member Monetary Policy Committee led by Governor Mervyn King held the ceiling for so-called quantitative easing at 275 billion pounds ($438 billion), as forecast by all 38 economists in a Bloomberg News survey. The bank, which expanded QE by 75 billion pounds last month, said the current purchases will take another three months to complete and the “scale of the program will be kept under review.”
Europe’s debt turmoil has spread to Italy, further threatening Britain’s recovery, and the European Commission said today there’s a risk of a contraction in the U.K. economy in “at least one of the next few quarters.” The Bank of England may lower growth projections in its Inflation Report next week, which King will present at a press conference.
“The contagion through to Italy will be very concerning for the MPC,” said Philip Rush, an economist at Nomura International Plc in London. The statement “leaves the door firmly open to extending QE at any point up through February.”
The central bank also kept its key interest rate at a record low of 0.5 percent today, as predicted by all 52 economists in a separate poll. The pound erased its decline against the dollar after the announcement. It traded at $1.5958 as of 1:21 p.m. in London, up 0.3 percent on the day.
The European Commission cut its U.K. outlook today as export demand weakens and the economy suffers from the impact of government spending cuts. It sees growth of just 0.6 percent next year. Prime Minister David Cameron has said the fiscal squeeze is needed to shield the economy from the debt turmoil.
The euro crisis and a U.S. recovery that Federal Reserve Chairman Ben S. Bernanke has called “frustratingly slow” are weighing on the global economy. International Monetary Fund Managing Director Christine Lagarde said yesterday there are “dark clouds gathering in the global economy.”
The European Central Bank unexpectedly cut its benchmark interest rate to 1.25 percent last week. Central banks in Brazil, Denmark and Australia lowered their borrowing costs in the past month. Bank Indonesia unexpectedly cut its reference rate by half a percentage point to a record low of 6 percent today, while South Africa’s central bank kept its benchmark lending rate at a 30-year low of 5.5 percent.
The ECB bought Italian government bonds today, according to three people familiar with the transactions, who declined to be identified because the deals are confidential. The move helped to push the yield on the nation’s 10-year debt below 7 percent today after it surged to 7.25 percent yesterday.
In the U.K., policy makers including Charles Bean and Adam Posen have indicated they are open to more stimulus if it’s needed. Bank of England Markets Director Paul Fisher has said there’s a risk the economy will contract in the current quarter.
The MPC unanimously decided to expand stimulus last month, and considered an increase of as much as 100 billion pounds, to keep a credit squeeze from worsening. Since that decision, a gauge of bank reluctance to lend in dollars, the Libor-OIS spread, has reached the highest since July 2009. Minutes of today’s meeting will be published on Nov. 23.
U.K. economic expansion accelerated to 0.5 percent in the third quarter, according to data on Nov. 1. Still, surveys last week showed manufacturing shrank the most in 28 months in October and services growth slowed. William Morrison Supermarkets Plc Chief Executive Officer Dalton Philips said today the company is “cautious on the overall economic environment” and expects a “tough” Christmas.
The Bank of England will also publish new inflation forecasts next week. While consumer-price growth quickened to 5.2 percent in September, more than twice the bank’s target, policy makers forecast it will ease “sharply” next year. There are signs it’s cooling already, after the British Retail Consortium said yesterday retail prices rose an annual 2.1 percent in October, the weakest pace this year.
“We may start to see slower inflation in data next week, so the bank’s promises that the elevation in the rate will prove temporary will start to come good,” said Alan Clarke, economist at Scotia Capital in London. “For now they’re keeping their powder dry. They’ll get to at least 400 billion pounds of purchases, and any risks to that are that they do more, not less.”
--With assistance from Svenja O’Donnell, Mark Evans, Scott Hamilton and Andrew Atkinson in London. Editors: Fergal O’Brien, Simone Meier
To contact the reporter on this story: Jennifer Ryan in London at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com