BLBG:BOE Halts Stimulus as U.K. Inflation Threat Trumps Slump
Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that’s succumbed to a double-dip recession.
The nine-member Monetary Policy Committee led by Governor Mervyn King today held its quantitative easing target at 325 billion pounds ($524 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 percent. The pound erased its decline against the dollar.
With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Today’s decision signals price-growth worries are mounting even as the U.K. struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.
“They’re concerned about what the effect of the constant criticism on inflation could mean for expectations,” said Philip Rush, an economist at Nomura International Plc in London. “If the view is that the MPC isn’t doing what’s necessary to get inflation back to target becomes widespread, then that can be self-fulfilling.”
The pound rose 0.2 percent against the dollar after the announcement, erasing its loss on the day. It traded at $1.6140 as of 12:02 p.m. in London.
Inflation Concerns
The Bank of England isn’t alone in raising inflation concerns. Russia’s central bank refrained from cutting interest rates for a fifth month today, signaling determination to hold down price growth. The European Central Bank said today that professional forecasters raised their estimates for inflation this year and next. Forecasters estimate euro-area inflation will average 2.3 percent and 1.8 percent, up from 1.9 percent and 1.7 percent three months ago respectively.
The MPC made its decision with new quarterly economic forecasts that will be published next week. King, whose second term ends in June 2013, will defend the actions at a press conference on May 16 and face questions from lawmakers in Parliament in the coming weeks.
Factory output rose a faster-than-expected 0.9 percent in March from February, when it fell a downwardly revised 1.1 percent, the statistics office said today. Overall industrial production fell 0.3 percent, in line with economists’ forecasts.
Reports last week indicated manufacturing and services weakened in April after the economy shrank 0.2 percent in the first quarter. J Sainsbury Plc (SBRY), the U.K.’s third-largest supermarket owner, said yesterday that the “wider economic situation remains uncertain.”
Europe Risks
In the euro area, Britain’s biggest export market, Spain is struggling to contain speculation it will need a bailout, while a political stalemate in Greece after elections has raised concerns the country may leave the currency bloc. More than 50 percent of investors predict a country will exit this year, according to the Bloomberg Global Poll published today.
The risks in the region have pushed the euro to its weakest in 3 1/2 years against the pound. Gilts have risen as investors sought the relative safety of U.K. government debt, pushing the 10-year gilt yield to a record low.
Still, consumer-price growth accelerated to 3.5 percent in March and inflation concerns are mounting.
Deputy Governor Paul Tucker said April 18 that the “uncomfortably above target” rate could hold above 3 percent into the second half of the year. Policy maker Adam Posen ended a push for further stimulus last month and minutes of that meeting said there was a risk that inflation may “fall less rapidly” than projected.
King Criticism
Minutes of today’s decision will be published May 23 and may reveal a split among policy makers. David Miles, the only MPC member to vote for more stimulus last month, has since said in an interview that decision looks vindicated, while Martin Weale said data showing the U.K. slipped back into recession strengthened the argument for more QE.
Today’s announcement comes as King is already facing criticism for his handling of the financial crisis and for lending political support to the Conservative-led government. He drew fire from the opposition Labour Party for describing the government’s fiscal squeeze as a “textbook response” to the turmoil in a BBC radio interview on the day of municipal elections last week.
Budget Cuts
Prime Minister David Cameron is losing voter support as the economy weakens and is relying on the central bank to provide stimulus as he pushes through spending cuts to reduce the budget deficit.
“We have already made some tough choices and we will continue to make sure we keep spending down” so that the U.K. “is protected from the global storm,” Cameron said yesterday.
King also said that despite a “patchy picture,” the U.K. should “start to see a steady, slow recovery coming during the course of the year.” To support the recovery, interest rates are likely to remain low “for the time being,” he said.
The stimulus program may be revived if the recovery fails to materialize. National Australia Bank Ltd. (NAB), owner of Britain’s Clydesdale Bank, said April 30 it will cut more than 1,400 jobs in the U.K. Dixons Retail Plc (DXNS), the U.K.’s largest consumer- electronics retailer, said today that the consumer environment “remains uncertain in many of our markets.”
To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
