Tags: Bank | England | Policy | Economy

Bank of England Leaves Policy on Hold as Economy Steadies

Thursday, 06 Sep 2012 07:39 AM

 

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The Bank of England stuck to its current policy of government bond purchases on Thursday, as Britain is creeping out of recession and hopes are running high for a sweeping move by the European Central Bank to ease the eurozone crisis.

Attention will now turn to the ECB's interest rate decision and news conference, at which governor Mario Draghi is expected to announce the framework for a new bond-buying plan aimed at bringing Spain and Italy's borrowing costs down.

The crisis in the eurozone, Britain's main export market, has hurt demand and made businesses reluctant to invest, adding to the headwinds for growth from the government's tough austerity plan to erase a huge budget deficit.

The government has announced a number of measures to get credit flowing and boost infrastructure and house building without spending taxpayers' money. But finance minister George Osborne remains under pressure to loosen austerity.

Since the BoE's August meeting, a rebound in closely watched business surveys has increased hopes that the economy is crawling out of recession after three quarters of contraction, though the road to a proper recovery still looks bumpy.

After the two-day meeting that ended earlier on Thursday, the Monetary Policy Committee made no change to the current plan to buy 50 billion pounds of British government bonds, which will take its total purchases to 375 billion pounds by November.

The central bank also left its interest rate unchanged at a record-low 0.5 percent, in line with a Reuters poll of economists, who had all bet on an unchanged policy.

Sterling was steady and gilts were little changed after the decision.

"The MPC's decision to leave policy on hold today was unsurprising and may partly have reflected a desire to wait to see what comes out of today's ECB meeting," said Vicky Redwood, economist at Capital economics.

However, most see another dose of quantitative easing once the current round is completed in November to support an economy that has not fully recovered from the 2008-2009 slump and has been back in recession since late last year.

"The economy is clearly still finding life very difficult; and further stimulative action remains highly likely in the fourth quarter," said IHS Global Insight economist Howard Archer.

CONTRACTION

The central bank and most economists see a tepid recovery as inflation falls back towards its 2 percent target after output is likely to be lower in 2012 than last year.

The Organization for Economic Cooperation and Development (OECD) became the latest organization to slash its growth forecasts, predicting a contraction of 0.7 percent this year.

The government launched a fresh set of reforms to the planning system and announced 10 billion pounds in guarantees for house building on Thursday aimed at boosting construction, which has been the main drag in the first half of 2012.

An unexpected drop in house prices in August reported by lender Halifax on Thursday highlighted the sector's problems.

Meanwhile, data from the car manufacturing lobby SMMT showed that new car registrations barely grew last month, though the sector remains one of the few bright spots with 3.3 percent more registrations in the first eight months of 2012 than last year.

But with any meaningful overall economic recovery elusive, the debate among BoE policymakers about the right amount and form of stimulus may have been lively at the latest meeting, even after the departure of arch-dove Adam Posen.

Thursday's decision was the first for new rate-setter Ian McCafferty, who joins the nine-member Monetary Policy Committee from the Confederation of British Industry.

When the BoE launched the current round of gilt purchases in July, chief economist Spencer Dale and external MPC member Ben Broadbent voted against the extension.

They did not think the inflation outlook had improved enough, and thought other steps to get credit flowing such as the bank's recently started Funding for Lending Scheme could be sufficient.

However, others considered adding even more stimulus at the August meeting.

The market will have to wait until the minutes of the latest meeting are published on September 19 to find out how the debate has shaped up.



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