Bloomberg News

U.K. Manufacturing Slump Seen Spurring BOE Into Stimulus Revival

June 01, 2012

Britain’s deeper-than-forecast manufacturing slump, suggesting the economy remains mired in recession, may prompt the Bank of England to resume stimulus as soon as next week, Deutsche Bank AG and and Citigroup Inc. said.

Deutsche Bank economist George Buckley in London said the central bank will increase its bond-purchase target by 50 billion-pound ($77 billion) on June 7, revising a previous forecast for no change in quantitative easing. Citigroup’s Michael Saunders also sees an increase that day.

U.K. manufacturing shrank last month at the fastest pace in three years, a survey yesterday showed, pointing to continued weakness in the economy after two quarters of contraction. While the Bank of England halted expanding its bond-purchase plan last month, policy makers have indicated they will restart it if needed as the euro-area crisis deepens.

“There is plenty of scope for more,” Saunders said. “Other options for stimulus, if QE does reach its limits, include credit easing and temporary fiscal stimulus. If the euro crisis continues to worsen, all these options may quickly come into play.”

JPMorgan Chase & Co. economist Malcolm Barr brought forward his forecast for more QE to July from August and said a “big fall” in a services index next week could prompt a move by the central bank on June 7. Philip Shaw at Investec Securities, who forecasts further stimulus in August, said the odds of a move sooner have “clearly shortened.”

Services Report

The manufacturing index dropped to 45.9 in May from 50.2 in April, where a reading below 50 indicates contraction. Economists had forecast a decline to 49.7. An index of services probably fell to 52.4 from 53.3, economists said before a report on June 7.

The Bank of England will announce its latest monetary policy decision hours after the service measure is published. It will keep its bond-purchase target at 325 billion pounds, said 38 of 41 economists in a survey. It will also leave its benchmark interest rate at a record-low 0.5 percent, according to a separate survey. Many of the responses were received before the manufacturing report.

Britain’s recovery is under pressure from the government’s fiscal squeeze, threats from the euro region and cooling global growth. In Europe, Greek voters return to the polls on June 17 after a deadlocked result last month raised concerns it may exit the euro. Prime Minister David Cameron has warned the U.K. won’t be immune to the euro turmoil, while Bank of England Governor Mervyn King described it as a “storm” heading towards British shores.

“The MPC will not stray from its position this time, but it is not impossible that it sanctions more QE,” Shaw said. “There are a number of clear reasons to point to the likelihood of more easing in due course.”

To contact the reporter on this story: 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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