UPDATE 2-BoE's Broadbent expects recovery in UK construction

Mon Oct 29, 2012 4:39pm EDT

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* Says UK construction was victim of global credit crunch

* Economy emerged from recession in third quarter

By Sven Egenter

LANCASTER, England, Oct 29 (Reuters) - Britain's construction sector, the main drag on the economy so far this year, should improve soon, Bank of England policymaker Ben Broadbent said on Monday.

According to official data, Britain endured its second recession in four years between October 2011 and June 2012, when construction output slumped. Even in the third quarter, when the economy returned to growth, construction contracted while services and manufacturing output rose.

Rate-setters will decide next week whether to inject further stimulus into the economy on top of the 375 billion pounds ($600 billion) approved since the start of the financial crisis.

In a speech on Monday, Broadbent said it was not "entirely clear that we had a double dip". The fact that, in his view, no boom preceded the "bust" in construction meant there was still spare capacity and room for the sector to grow, he said.

"The prospects for the construction sector look less unfavourable than they have been for a while," Broadbent said at the Lancaster University Management School in northern England.

The British construction sector - which accounts for less than 7 percent of GDP - was a victim of a global credit crunch, not a local boom beforehand, he said.

Broadbent, a former Goldman Sachs economist, noted that since 2008 it was the supply of mortgage debt, not the demand for it, that was driving activity in the British housing market.

Broadbent also defended inflation as the right target for the BoE's Monetary Policy Committee, noting that the MPC would continue to set policy in order to meet it.

The MPC will announce its monthly policy decision next week and Broadbent had already indicated his reluctance to vote for more quantitative easing (QE) asset purchases, saying in September that high inflation limited the central bank's scope to ease policy.

Broadbent told a regional newspaper that he had yet to reach a decision on another round of QE and said he doubted whether his fellow policymakers had done so either.

"I literally have not made up my mind and I doubt anybody else in the committee has, until they have seen everything and thought about it," he told the Lancashire Evening Post.

Annual inflation slowed to 2.2 percent in September, nearer the BoE's 2 percent target. MPC member Spencer Dale said in an interview released on Monday that inflation was sticky and he repeated his call for caution around more QE.

Comments by Dale and fellow policymaker Charlie Bean that the strong third-quarter growth was unlikely to persist suggested a decision by the central bank next week to hold fire on more bond-buying might be less clear-cut than many analysts had begun to believe.

Broadbent told the regional paper that markets suggest interest rates would stay low for some time. The BoE has held rates at a record low of 0.5 percent since March 2009.

"I will say no more than to point at what is in financial markets, that is that they are pretty flat for a pretty long time, as far as I can see," Broadbent said.

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