BOE Keeps Asset-Purchase Plan at 125 Billion Pounds (Update2)

by Svenja O’Donnell

July 9 (Bloomberg) -- The Bank of England stuck to its plan to buy bonds with 125 billion pounds ($202 billion) of newly printed money as officials assess whether the worst of Britain’s recession is over.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the interest rate at 0.5 percent and refrained from expanding its asset-purchase plan. Twenty of 36 economists in a Bloomberg News survey predicted the outcome. The rest said officials would increase the plan.

Bonds tumbled after the decision, which dashed some investors’ expectations the bank would spend the full 150 billion pounds authorized by Gordon Brown’s government. King said last month evidence from the plan is “positive” so far and the Bank of England said today it will wait until it has new inflation forecasts in August before deciding the next step.

“The gilt market is having a bit of a sulk because it didn’t get what it wanted,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “I’m a little bit surprised but not too alarmed” by the decision. “It’s a sign of caution.”

The yield on the benchmark 4.5 percent gilt due March 2019 jumped and was at 3.744 percent at 12:45 p.m. in London compared with 3.59 percent earlier today. It was 3.62 percent before the plan’s announcement in March. The pound rose as much as 0.6 percent to $1.6265.

Global Rebound 

Britain’s economy may be helped by a global rebound. The International Monetary Fund yesterday said the U.K. will return to growth next year, forecasting an expansion of 0.2 percent after a contraction of 4.2 percent this year.

While gross domestic product fell 2.4 percent in the first quarter, the most since 1958, the economy may now be stagnating, the National Institute of Economic and Social Research says.

Some economists said the Bank of England may now slow the pace of purchases, keeping sufficient funds to extend the program through to the next decision on Aug. 6. At its current rate, it could have expired in a “couple of weeks,” says Deutsche Bank AG.

“The committee has gone for the cleaner approach of having a thorough review of the effectiveness of the policy in the build-up to the August Inflation Report,” said David Tinsley, an economist at National Australia Bank in London and a former central bank official. “It would be wrong to conclude from this that the policy of quantitative easing will not be extended further.”

Endgame? 

Others, such as Ross Walker at Royal Bank of Scotland Group Plc, said the central bank may be about to call an end to the plan.

“The MPC has sent a clear signal that the endgame for QE has arrived,” said Walker, U.K. economist at Royal Bank of Scotland. “If this was not the Bank of England’s intention then their communication has back-fired badly.”

Central banks around the world have cut rates close to zero and bought bonds to aid growth. The European Central Bank plans to start buying 60 billion euros ($83.5 billion) of covered bonds this month, and the Bank of Japan may extend its emergency credit programs as soon as next week. Last month, the Federal Reserve said it will let one emergency-lending program expire this year, and trim two others.

Political Fortunes 

For now, Prime Minister Brown is struggling to restore his political fortunes after four quarters of economic contraction. He must call an election within the next year, and his ruling Labour Party had the support of 25 percent of voters in a ComRes survey in the Independent on June 30. That compares with 36 percent for the opposition Conservatives.

Economic data have been mixed as banks limit credit. While a quarterly survey of lenders showed on July 2 that they expect to increase loans in the next three months, mortgage approvals rose less than economists forecast in May. Factory output fell for the first time in three months and Diageo Plc, the world’s biggest liquor maker, plans to cut 500 jobs in Scotland.

Bank of England markets director Paul Fisher said last month that “we should not be complacent” as problems at banks keep threatening the economy. King said he felt “more uncertain now than ever.”
Printing money may also fuel inflation, which slowed less than economists forecast in May to 2.2 percent, complicating the Bank of England’s task. The bank, which targets an inflation rate of 2 percent, will release its next quarterly forecasts on August 12.

“The Committee now appears to have moved into ‘wait and see’ mode,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. and a former central bank official. “The Monetary Policy Committee appears to believe that the economy has reached the bottom - but, even if the only way is up, it could still be a very long and arduous climb.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.
Last Updated: July 9, 2009 07:55 EDT