Bank of England Bond Plan May Be at ‘Turning Point’
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.
Bond Drop
Gilts dropped and the pound rose when the Bank of England 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 yesterday. It advanced a further 7 basis points to 3.85 percent today.
The pound, which advanced 1.6 percent yesterday, slipped 0.5 percent to $1.6261 as of 8:46 a.m. in London. The central bank also left its benchmark interest rate at a record low of 0.5 percent.
“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 car loan. Philippe-Henri Burlisson, an investor at Groupama Asset Management in Paris, said the inflation outlook will be “key” in policy makers’ thinking.
‘Signs of Stabilization’
“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.”
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.
British Airways Plc, which reported the biggest loss in its history in the quarter ended March 31, may face strikes as the airline pushes unions to accept almost 4,000 job cuts.
Taking Root
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.
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.”