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 Bank of England holds rates, resists pumping extra cash

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PostSubject: Bank of England holds rates, resists pumping extra cash   Fri Jul 10, 2009 1:16 am
Bank of England holds rates, resists pumping extra cash

Thu July 9, 2009 9:15 pm


INTERNATIONAl. The Bank of England has held interest rates at a record low and decided against expanding its programme of injecting money directly into the economy.

The rates move by the Bank's Monetary Policy Committee was widely expected by economists, but the decision not to increase the scale of its money-printing programme came as a surprise

The Bank of England's Monetary Policy Committee (MPC) had been widely expected to expand its quantitative easing (QE) programme - effectively printing money - by £25 billion to £150 billion.

But the scale of the operation was left unchanged at £125 billion, while interest rates were held at their current 0.5% record low for the fourth month in a row.

The decision comes despite concerns over the fragility of recent signs of stabilisation in the economy following a steep decline.

Manufacturing output showed a surprise fall in May, while official figures have shown a far worse than expected 2.4% slump in overall GDP in the first three months of 2009 - the worst in more than 50 years.

In a short statement, the Bank said its current QE operations would take another month to complete.

It will review the programme again at its August meeting, alongside its latest inflation projections.

The pound immediately gained 1% against the dollar, climbing above US$1.62 US on signs the Bank is more optimistic about economic prospects.

According to the Bank's own data, credit conditions remain tight and lending to business fell in April and May - suggesting that the boost to the money supply is having little immediate impact.

Despite the decision to hold back from further QE this month, the CBI business group predicted the programme would eventually be extended.

http://www.bi-me.com/main.php?id=38809&t=1&c=35&cg=4&mset=1011

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PostSubject: Bank of England May Be at ‘Turning Point’ on Emergency Plan   Fri Jul 10, 2009 2:04 am
Bank of England May Be at ‘Turning Point’ on Emergency Plan

July 10 (Bloomberg) -- The Bank of England’s emergency bond-buying program may end next month as Britain’s worst recession in a generation eases, economists say.
Officials decided yesterday not to expand the 125 billion- pound ($203 billion) spending plan and said they will pause purchases of government bonds at the end of July. That suggests they may be preparing to wrap up the policy, said Credit Suisse Group AG, Citigroup Inc. and Fortis Bank Nederland Holding NV.
“We’re at a turning point,” said Nick Kounis, an economist at Fortis in Amsterdam and a former U.K. Treasury official. “We know the economy has probably stabilized. Even though they can’t see the effects of what they’re doing, they may be starting to worry about overkill.”
Bank of England Governor Mervyn King will assess the plan’s success in August and any decision to finish it would shift the focus of policy to the exit strategy. While some economists are concerned creating too much money to buy the bonds will spark inflation, officials stress they can contain those risks by offloading the debt they have bought and raising interest rates.
In the U.S., the Federal Reserve has already started rolling back measures set up to stave off a deeper recession. The Fed said last month it will let one emergency-lending program expire this year and trim two others.
Gilts dropped and the pound rose when the Bank of England yesterday declined to push its purchase plan to the 150 billion- pound limit authorized by Gordon Brown’s government. The yield on the benchmark 10-year bond jumped the most in three months, climbing 17 basis points to 3.78 percent. The central bank also left its benchmark interest rate at a record low of 0.5 percent.
Inflation Risks
“Not extending the program this month makes it more likely they will stop it next month,” said Michael Saunders, chief western European economist at Citigroup in London. “Growth prospects are better and the inflation outlook is higher. This may be cordoning off their scope to keep going.”
The U.K. inflation rate fell less than economists forecast in May and is still above the bank’s 2 percent target. Policy makers predicted in their May 13 forecasts that the rate will drop below target and won’t return to it in two years.
The bank’s concerns about deflation may yet lead them to expand the purchase plan. Philippe-Henri Burlisson, an investor at Groupama Asset Management in Paris, said the inflation outlook will be “key” in policy makers’ thinking.
“For them to stop would mean that they are convinced the economy is doing better enough,” Burlisson said. “I have a hard time believing this.”
‘Signs of Stabilization’
Bank of England Deputy Governor Charles Bean said June 24 that it appeared that “it looks like we may be around the trough” of the slump, and policy maker Andrew Sentance said that “there are signs of stabilization, but it doesn’t tell us how strong the recovery will be.”
Gross domestic product slumped 2.4 percent in the first quarter, the most in 50 years, and data since then have been mixed. House prices dropped 0.5 percent in June after jumping 2.6 percent the previous month, Halifax says. Manufacturing fell in May for the first time in three months.
The economy’s contraction eased to 0.4 percent in the second quarter, the slowest pace in a year, according to an estimate by the National Institute of Economic and Social Research. The International Monetary Fund this week raised its U.K. forecast for 2010 to predict a return to growth.
‘Biggest Challenge’
If a recovery takes root, the central bank’s “biggest challenge” will be determining the exit strategy from its emergency plan, according to Adam Posen, deputy director at the Peterson Institute for International Economics in Washington, who will become a U.K. policy maker in September.
Economists say rate increases are unlikely this year. Citigroup’s Saunders predicts the bank will lift the rate in the second quarter of 2010. Fortis’s Kounis said policy makers will wait until the second half before raising it “gradually.”
“The economy isn’t strong but the extreme risks quantitative easing was addressing have diminished,” said Robert Barrie, chief U.K. economist at Credit Suisse in London, and a former Treasury official. “It is the beginning of the end for QE.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1I41I.rytak

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