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UPDATE 1-BoE holds QE steady despite escalating euro crisis
November 10, 2011 / 12:52 PM / 6 years ago

UPDATE 1-BoE holds QE steady despite escalating euro crisis

LONDON, Nov 10 (Reuters) - The Bank of England left its target for asset purchases steady on Thursday despite an escalation in the euro zone debt crisis, which may soon force the Bank to inject more stimulus.

With the government’s hands tied by its pledge to erase the country’s budget deficit of some 10 percent of gross domestic product, the onus to support the economy will remain firmly on the BoE, especially if the euro zone goes into meltdown.

The central bank restarted its quantitative easing programme last month with a plan to buy a further 75 billion pounds of government bonds over the next four months, on top of the 200 billion pounds of purchases it made from 2009 to 2010.

“There may have been one dissenting voice for more QE but they have the programme in the pipeline and it is steady as she goes for now,” said Scotia Capital analyst Alan Clarke, who expects an extension in February to 350 billion pounds.

“If the euro zone goes pop the BoE may well expand its programme sooner,” he said.

All nine members of the Monetary Policy Committee voted for October’s additional stimulus. November’s voting pattern will be published in two week’s time.

Political and economic crisis in Italy has spurred fears of a split in the euro zone, with borrowing costs for Europe’s third biggest economy at unsustainable levels and the bloc unable to afford a bailout.

Even before the latest escalation of the euro crisis, a welter of gloomy economic news had fuelled recession fears, as Britain’s cash-strapped consumers spend less.

Business minister Vince Cable doused any hopes that the government was about to open its coffers and loosen its austerity drive.

“Large scale tax cuts and for that matter big increases in public spending are not under consideration,” he said when asked about finance minister George Osborne’s upcoming autumn budget statement.

MORE PESSIMISM

The Bank also left interest rates steady at a record low 0.5 percent, where they have been since March 2009, even though inflation has been well above its 2 percent target for most of the time since then and touched a 3-year high of 5.2 percent in September.

Sterling edged up while gilts briefly extended losses after the BoE’s announcement, as some in the market had braced for an outside chance of more easing in November.

Most economists polled by Reuters expected the BoE to eventually pump more money into the economy to ward off another slump coupled with falling prices, with the median forecast for a total of 325 billion pounds to be announced in February.

Policymakers will have been armed with their latest set of quarterly economic forecasts at this month’s meeting, which they will publish next week, and which are likely to show a much more subdued outlook for growth and inflation.

“At a minimum, the report is likely to endorse market expectations for interest rates to stay on hold for the next two or three years,” said Vicky Redwood from Capital Economics.

“But it could also suggest that more QE will be necessary if the inflation target at the two year horizon is to be met. So despite this month’s pause, further QE should not be far off,” she said.

In its August inflation report, the BoE predicted growth of over 2 percent for next year. But most economists have sharply lowered their forecasts since then. BoE policymaker Adam Posen said recently growth was likely to be little more than 0.5 percent.

Governor Mervyn King said after the October decision that the worsening outlook for the global economy had made further easing necessary as Britain was caught in the worst financial crisis since the Great Depression of the 1930s.

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