Tags: BoE | Policy | Euro | Crisis

BoE Keeps Policy Steady as Euro Crisis Deepens

Thursday, 08 Dec 2011 08:33 AM

 

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The Bank of England voted on Thursday to stick with its program to pump an extra 75 billion pounds ($118.22 billion) into Britain's rapidly slowing economy, as markets nervously eye the outcome of a critical European Union summit.

The decision on quantitative easing was unanimously expected by economists. BoE officials had said over the past month that they saw little merit in fine-tuning October's decision to raise the target for QE gilt purchases to 275 billion pounds ($433.47 billion) from 200 billion pounds.

However, most economists expect the BoE to authorize another 75 billion pounds of gilt purchases by February — when the current purchases are complete — because the central bank already forecasts that weak growth will push inflation well below its 2 percent target over the next 18 months.

"There is a risk that the Bank opts to add to the program at the next meeting but we believe it is more likely they wait until February," said Deutsche Bank economist George Buckley.

"Even then we cannot rule out further purchases in the event that the recession expected in the euro area has a more sizeable impact on the UK than our current forecasts show," he added.

The OECD said last week that Britain had probably already entered a mild recession — a gloomier assessment than the BoE — and earlier on Thursday Britain's biggest retailer, Tesco reported a fall in underlying sales for a fourth consecutive quarter.

Britain's economic recovery from the financial crisis has faltered over the past year, with consumer demand hurt by high inflation and business confidence more recently undermined by the euro zone crisis. Interest rates have remained at a record low 0.5 percent since March 2009.

EURO TURMOIL

BoE Governor Mervyn King has identified the euro zone crisis as the single biggest risk to Britain's already gloomy economic prospects for 2012, and finance minister George Osborne said earlier on Thursday that a eurozone breakup would cause Britain years of economic hardship.

"I'm confident we have the right plans in place," Osborne told legislators from the upper house of parliament. "However much contingency planning you do, a disorderly collapse of the euro would do huge damage to the U.K."

In a sign of the deepening crisis, the European Central Bank cut interest rates on Thursday ahead of the meeting of EU leaders in Brussels. Euro zone leaders need to convince financial markets that they are committed to budget discipline and keeping the shared currency bloc intact.

French President Nicolas Sarkozy and Germany's Angela Merkel will lay out plans at the EU summit to anchor stricter budget discipline in the euro area and restore market trust.

In a bid to insulate Britain's banking system from euro zone turmoil, last week the BoE took part in international central bank efforts to make dollar funding more available, and on Tuesday it readied a new scheme to provide sterling liquidity.

However, banks saw no need to tap the BoE for 3-month dollar funds at the first offering on Wednesday.

The BoE treats liquidity operations and monetary policy as separate, and there are other reasons why economists doubt the BoE will add to its QE program before February.

Policymakers say it could be hard for the market to supply gilts at a much faster rate than the BoE is purchasing them. And with inflation still close to a three-year high at 5 percent, one policymaker has said he wants to see evidence that inflation is falling as forecast before authorizing more QE.

© 2014 Thomson/Reuters. All rights reserved.

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