Bank of England Hints Move to More Stimulus

Wednesday, 21 Sep 2011 09:34 AM

 

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The Bank of England appears to be gearing up to pump billions more into the British economy to stimulate a faltering recovery, minutes to its last rate-setting meeting suggested Wednesday.

Though American economist Adam Posen was alone among the nine members to vote in favor of resuming asset purchases, "most members" agreed that the case for more stimulus had strengthened in the past month, according to the minutes of the September meeting of the Monetary Policy Committee.

"For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting," the minutes said.

All nine rate-setters also voted to keep the main interest rate unchanged at the record low of 0.5 percent.

Sterling tanked from $1.5681 to an 8-month low of $1.5611 as markets priced in the likelihood of more monetary stimulus in the months to come. However, it has recovered some ground to trade a little lower on the day at $1.5665.

The program, known as quantitative easing, was halted in December 2009 after 200 billion pounds ($320 billion) had been splashed out buying financial assets from banks.

Most analysts think the bank will hold off until it is armed with the first estimate of third-quarter economic growth and its quarterly economic projections. That suggests that more stimulus would not emerge until November.

"The minutes indicate that the MPC already sees the current situation, if it continues, to merit further quantitative easing," said Chris Williamson, chief economist at Markit.

"Early warning indicators such as the business surveys have slumped to levels that would normally trigger extra stimulus, austerity measures have hit domestic consumer confidence via record public sector layoffs, growth has slowed globally and the ongoing eurozone financial crisis continues to rattle financial markets," Williamson said.

The Bank of England's Posen argues that the key economic problem facing Britain is the lack of financing for "constructive risks" in the private sector as households concentrate on paying off debt, banks build up reserves and non-financial companies hoard cash. The answer, he contends, is an expansionary monetary policy.

Mounting speculation that the Bank of England may do more to shore up the economy comes just hours ahead of an expected decision by the U.S. Federal Reserve to enact more measures to help lift U.S. economic growth, which has also slowed down sharply in recent months.

In a report published Monday, the Bank estimated that the previous monetary stimulus raised GDP by as much as 1.5 percent to 2 percent at the peak, while adding up to 1.5 percentage points to the inflation rate. The article added, however, that the impact was very difficult to measure.

The minutes revealed that the MPC also discussed cutting the base rate below 0.5 percent, changing the maturity of assets acquired through quantitative easing, or providing longer-term guidance on the future path of the bank rate.

"At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required," the minutes said.

The hint from the Bank that it may pump more money into the economy comes a day after the International Monetary Fund cut its growth forecast for the British economy to 1.1 percent this year from its previous forecast of 1.7 percent in April. It trimmed its prediction for next year from 2.3 percent growth to 1.6 percent. The IMF also urged the government to slow down its austerity measures should growth fall even lower.

Expectations of a new shot of stimulus have grown as economic growth has slowed to 0.2 percent in the second quarter and Prime Minister David Cameron's government focuses on cutting spending to rein in the budget deficit.

Despite the austerity program, net public sector borrowing hit 15.9 billion pounds in August, the highest ever for that month, the Office for National Statistics said Wednesday. That was an increase of 1.9 billion pounds from July.


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