Bloomberg News

BOE’s Miles Sees Risk a Nation Will Quit Euro on Turmoil

November 25, 2011

(Updates with comment from fund manager in eighth paragraph. For more on Europe’s debt crisis, see EXT4.)

Nov. 24 (Bloomberg) -- Bank of England policy maker David Miles said there’s a risk a country may leave the 17-nation euro area and that the threat from the region’s crisis has increased uncertainty about the outlook for the U.K. economy.

“I don’t think any of us can feel confident one way or another about whether all the countries that are currently in the euro zone will still be in it,” Miles said in an interview on ITV broadcast late yesterday.

In the U.K., “the return to more normal rates of growth is something that is going to be a gradual process over the course of the next two years,” Miles said. “There’s plenty of risks and that might turn out to be too optimistic, that might turn out to be too pessimistic.”

The Bank of England, which restarted bond purchases in October to aid the recovery, cut its 2012 growth forecast this month by more than half. While gross domestic product rose 0.5 percent in the third quarter, the central bank said yesterday that underlying growth was probably weaker than that.

The pound was little changed against the dollar, trading at $1.5554 at 9:50 a.m. in London. The euro was at $1.3397, up 0.4 percent on the day.

European Turmoil

There are signs the turmoil is starting to affect Germany, Europe’s largest economy, after bids at a sale of securities repayable in January 2022 fell 35 percent short of the 6 billion euros ($8 billion) on offer. German 10-year bonds extended a decline today, pushing the yield on the securities as much as 10 basis points higher to 2.25 percent.

Miles said that “it’s pretty difficult to know where we’ll be even at the end of this week, let alone where we’ll be in three to six months time.”

“I wouldn’t be surprised if someone leaves the euro,” Trevor Greetham, head of asset allocation at Fidelity Worldwide Investment, told Bloomberg Television in an interview from London today. “You’d need to step in with unlimited force.”

The central bank’s nine-member Monetary Policy Committee maintained the target for its bond-purchase program at 275 billion pounds ($427 billion) this month, saying in the minutes of its decision that there was “little merit in fine tuning” while the current four-month plan was continuing.

‘Main Emphasis’

Nevertheless, risks from the euro-area debt crisis “had increased” and some MPC members said an increase in so-called quantitative easing “might well become warranted in due course.”

Miles also said in the interview he expects U.K. inflation to ease “significantly” in 2012 from its current 5 percent level. While price growth is “uncomfortably above” the bank’s 2 percent target, it would be a “big mistake’ to increase interest rates in response, he said.

Bank of England Chief Economist Spencer Dale echoed those remarks yesterday, saying inflation will slow and the economy ‘‘needs more support.’’

‘‘That’s the main emphasis and onus on policy at the moment,’’ Dale said.

--With assistance from Paul Dobson and Francine Lacqua in London. Editors: Patrick Harrington, Simone Meier

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

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


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