Bloomberg News

King Says BOE Stimulus Isn’t at Limit Amid Euro Crisis Risk

February 15, 2012

(Updates with change of forecast by BNP Paribas in 11th paragraph.)

Feb. 15 (Bloomberg) -- Bank of England Governor Mervyn King said policy makers can expand their stimulus program further if needed to ward off the threat to Britain’s “slow and uncertain recovery” posed by the euro region’s debt crisis.

“If we wanted to do more, we certainly could do it,” King told reporters in London as he presented the bank’s quarterly Inflation Report. The bank’s program to hold as much as a third of the gilt market is a “high number, but it’s only a third and the amount of gilts which is out there is increasing all the time” and “I don’t think that’s a practical limit at all.”

The central bank expanded its bond-purchase program to 325 billion pounds ($510 billion) this month after the economy shrank in the fourth quarter. Policy makers raised their forecast for inflation today, predicting an undershoot of their 2 percent goal in two years and an even chance of reaching it in three years.

“The path of recovery is likely to be slow and uncertain,” and “for much of this year, there is likely to be a ‘zigzag’ pattern of alternating positive and negative quarterly growth rates,” King said. “The biggest risk to the recovery stems from developments in the euro area, where there remain concerns about the indebtedness and competitiveness of some member countries.”

The pound was little changed against the dollar, trading at $1.5686 as of 3:06 p.m. in London. It weakened against higher- yielding currencies such as the New Zealand and Australian dollars. The yield on the two-year gilt was at 0.40 percent.

‘Disorderly Outcome’

The Bank of England also said that failure to implement reforms in the euro area “could trigger a disorderly outcome and result in sharply lower growth” in the region.

While Greece has agreed to austerity measures needed to secure a second bailout package, euro-area finance ministers canceled a Brussels meeting slated for today, citing a lack of political assurances from Greek leaders to stick to the pledges. Ministers will instead hold a teleconference to prod Greece to do more to clinch the package.

The central bank sees U.K. inflation slowing to its 2 percent target by the end of this year and easing to 1.8 percent in two years, according to the Inflation Report. It sees annual gross-domestic-product growth at about 3 percent by the end of 2013. The trough in growth will be in the first half of 2012. The forecasts today were published in the form of fan charts and the data underlying the charts will be released next week.

“Inflation is judged somewhat more likely to be below the target than above it for a good part of the forecast period,” the Monetary Policy Committee said. At the end of three years, “those risks are judged to be broadly balanced.”

‘Loosening’ Bias

“The MPC does not see a strong case for more quantitative easing, although it retains a bias toward further loosening,” said Simon Hayes, an economist at Barclays Capital in London and a former Bank of England economist. “Although the growth outlook remains weak, there should be no presumption of further monetary stimulus.”

BNP Paribas SA changed its forecasts for more QE, dropping a call that the central bank would expand stimulus again in May. David Tinsley, an economist at BNP in London and a former central bank official, said the report “appears quite deliberately pitched to damp expectations for further asset purchases.”

Market Expectations

The Bank of England’s forecasts are based on the bond- purchase target staying at the 325 billion-pound level set on Feb. 9 and market expectations for interest rates. Those show the benchmark rate staying at current record low of 0.5 percent until the third quarter of 2014.

In November, the central bank forecast that inflation would slow to 1.7 percent at the end of this year and 1.3 percent at the end of 2013. It saw annual GDP growth at about 3.1 percent at end-2013.

“Moving to a world of steady growth, inflation close to our 2 percent target, and a more normal level of interest rates, will take time,” King said. “There is a limit to what monetary policy can achieve when real adjustments are required. But with falling inflation, and the prospect of an end to the squeeze in real incomes leading to a recovery in growth, we are moving in the right direction.”

The central bank said the “quarterly path of output is likely to be volatile through 2012, reflecting the impact of various one-off factors” such as the Queen’s Jubilee holiday in June. Growth is “likely to remain weak in the near term, before gradually strengthening as households real incomes recover, supported by continued stimulus from monetary policy.”

Recent surveys indicate the economy may strengthen in the current quarter. U.K. manufacturing returned to growth in January, while expansion in the services sector accelerated. Stocks have risen this year, with the MSCI All-Country gauge up 9.3 percent. The FTSE 100 Index has added 6.2 percent.

--With assistance from Scott Hamilton and Svenja O’Donnell in London. Editors: Craig Stirling, Fergal O’Brien

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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