Bloomberg News

King May Add to Gilt Stash in 50-Billion Pound Insurance Gambit

February 09, 2012

Feb. 9 (Bloomberg) -- Bank of England Governor Mervyn King may pump another 50 billion pounds ($79 billion) into the U.K. economy today as he ramps up protection for a nascent recovery from the threat posed by Europe’s debt crisis.

The nine-member Monetary Policy Committee will raise the target for bond purchases to 325 billion pounds, more than a quarter of current outstanding gilts, according to 34 of 50 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion-pound increase and one no change. The bank will announce the decision at noon in London.

Indexes of services, manufacturing and construction all showed growth in January, suggesting the U.K.’s fourth-quarter contraction may not mark the start of a second recession. Still, officials in Greece are struggling to obtain the political assent needed to secure a second bailout and help stem turmoil in the euro area that has threatened Britain’s economy.

“It’s a choice of doing too much, and creating too much growth and inflation, or doing nothing, and scaring the gilt market while choking off the recovery,” said Alan Clarke, an economist at Scotia Capital in London. “Given the choice between those two extremes, I’d go with too much growth every time. So on balance, they’ll do another 50 billion.”

Policy makers have primed investors to expect another round of so-called quantitative easing after they completed 75 billion pounds of bond purchases this month. King said Jan. 24 the central bank has “scope” to add to stimulus, while Adam Posen said last week there’s a case for another 75 billion pounds.

Gilt Yields

The bank’s 275 billion pounds of bond purchases since early 2009 have pushed bond yields to a record low. The yield on the 10-year gilt was at 2.19 percent late yesterday in London after falling to 1.917 percent on Jan. 18, the lowest since Bloomberg began compiling the data in 1989.

Policy makers will also hold their benchmark interest rate at a record-low 0.5 percent today, according to all 56 economists in a separate poll. The MPC will make its decisions based on new forecasts, which it will publish on Feb. 15. Its November projections showed inflation slowing below the 2 percent target by the end of this year. Annual price gains eased to 4.2 percent in December.

London- and Rotterdam-based Unilever, the world’s second- largest consumer-goods maker, on Feb. 2 reported the weakest volume growth in almost three years in the fourth quarter and said it expects “gloomy” economic conditions to persist this year.

Growth Expectations

Signs of recovery may have dented the chances of a majority of officials voting for a 75 billion-pound increase in stimulus. A Feb. 3 survey showed U.K. services output grew the most in 10 months in January. Separate gauges last week indicated manufacturing returned to growth and construction continued to expand. In the U.S., the unemployment rate fell to 8.3 percent last month, the lowest since February 2009. Europe’s Stoxx 600 Index had its best January in 14 years and is up 7.6 percent this year.

After the services report, economists at Deutsche Bank AG, Morgan Stanley and JPMorgan Chase & Co. revised their Bank of England QE forecast to 50 billion pounds from 75 billion pounds.

“A majority on the committee will not feel a need to follow through on the more aggressive path of action implied by the central inflation forecast back in November,” Malcolm Barr, an economist at JPMorgan, said in a note. “Rising equity prices, improved bank funding conditions, and survey data in the U.K. and elsewhere are giving some grounds to revise up expectations of growth.”

Europe Threat

The European Central Bank’s Governing Council also meets today and will probably leave its benchmark rate at 1 percent, according to 55 of 57 economists in another survey. The other two forecast a cut to 0.75 percent. The bank will announce the decision at 1:45 p.m. in Frankfurt and President Mario Draghi will hold a press conference 45 minutes later.

Risks from turmoil in Europe support the case for continuing U.K. stimulus. The National Institute for Economic and Social Research, whose clients include the U.K. Treasury and the Bank of England, said the economy is back in recession and will shrink 0.1 percent this year. Researcher Simon Kirby said a return to growth depends on “decisive action” in the euro area.

Greek Prime Minister Lucas Papademos met with political party leaders yesterday as international officials and creditors hammer out terms for a second bailout. A failure to agree could mean Greece defaults on a bond payment due in March and spark contagion across the euro area, which buys almost half of British exports and where U.K. banks are exposed to more than $1 trillion of borrowings.

“The MPC will acknowledge that there are some welcome signs of improvement,” said Adam Chester, an economist at Lloyds TSB Bank in London and a former Bank of England official. “They may be cautiously optimistic, but they need to take account of the small risk that things could get a lot worse in Europe.”

--With assistance from Svenja O’Donnell, Scott Hamilton, Mark Evans and Anchalee Worrachate in London. Editors: Fergal O’Brien, Simone Meier

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

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


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