The Bank of England signaled that policy makers are moving closer to adding more stimulus to the economy, joining the Federal Reserve in contemplating further bond purchases to revive a flagging recovery.
The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan at 200 billion pounds ($313 billion). While Andrew Sentance pushed for a fourth month to raise the rate “gradually,” “most” officials see the central bank’s current stance as “appropriate,” according to minutes of the Sept. 9 meeting released by the central bank today in London.
“For some of those members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased,” the minutes said.
U.K. bonds extended gains after the minutes, which came after the Confederation of British Industry cut its growth forecast for next year following a series of reports showing the economy is slowing. In the U.S., the Fed said yesterday it’s willing to ease policy further to spur growth and support prices.
“It certainly seems that the MPC is edging closer towards doing more quantitative easing and perhaps out of all the central banks is getting closest in providing additional stimulus to the economy,” said Samuel Tombs, U.K. economist at Capital Economics Ltd. in London, in a telephone interview. Tombs said the Bank of England may buy an extra 50 billion pounds in government bonds “at the start of next year.”
The yield on the U.K.’s 10-year government bond plunged 16 basis points to 2.952 percent. The pound, which fell as much as 0.4 percent after the minutes, later rebounded. It was little changed at $1.5678 at 10:20 a.m. in London.
Data in the past month have signaled a “reduction in growth prospects” for the second half of the year, the minutes said. U.K. jobless claims unexpectedly increased in August, retail sales dropped for the first time in seven months and mortgage approvals declined to a 16-month low.
The CBI, Britain’s biggest business lobby, cut its growth forecast for next year to 2 percent from a projection of 2.5 percent in June. It also predicted the Bank of England will keep rates unchanged until the second quarter.
Some members said that recent data “indicated that the headwinds to a recovery in private-sector demand in the U.K. and overseas were somewhat stronger than previously thought and that the downside risks to activity had increased.”
One policy maker, whose name wasn’t specified, said that the risk of “an adverse hit to the supply capacity of the economy had increased in recent months.”
The threat of a renewed U.S. recession has clouded the outlook for global economic growth. The Fed yesterday moved closer to a second wave of unconventional monetary easing, saying for the first time that too-low inflation and sluggish growth, would warrant taking action.
The minutes “show clear parallels with the Fed,” said James Knightley, an economist at ING Financial Markets in London. “Should the global recovery take a turn for the worse it is clear that the BOE is prepared to take further action.”
Knightley said the Bank of England could buy more government bonds or private sector debt assets, an operation that policy maker Adam Posen last week described as ‘heavy-duty credit easing.” Purchasing corporate bonds such as mortgage- backed securities could free up lending and help unblock strains in credit that pose a drag on the economy, said Knightley.
In the minutes, policy makers said that the risks to the U.K. inflation outlook were “substantial” in both directions.
“Members stood ready to respond in either direction as the balance of risks evolved,” the minutes said.
Sentance reiterated yesterday that the central bank should raise its benchmark interest rate “slowly” to combat inflation as the British and world economies try to avoid a new recession. The bank needs to “gradually move interest rates up in a slow way which will not destabilize business confidence,” he said in an interview on Sky News television.
“We have to distinguish between unevenness of the rate of growth which we often get at this stage of the economic cycle and a genuine double-dip recession,” he said. “Certainly in the case of the U.K., I see that not as the main scenario, or globally as the main scenario.”
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