BOE tests faith in funding for lending as QE loses bite
The Bank of England might need to take a leap of faith on an untested credit plan to do what quantitative easing is failing to achieve.
With both of its deputy governors questioning the effectiveness of asset purchases, and economists forecasting a halt to that stimulus, that leaves the socalled Funding for Lending Scheme as officials’ primary policy tool. Policy makers begin a two-day meeting on Nov. 7 to decide on QE’s future.
The Bank of England’s three-month old plan encourages banks to provide cheap credit to companies and households, which contrasts with the trickledown effect of gilt purchases through QE.
“We are in unchartered territory,” said Steven Bell, chief economist at hedge fund GLC Ltd. in London and a former U.K. Treasury official. “The search for alternatives to QE is gathering pace” and with the FLS, the central bank is “trying new ways as the economy fails to respond to the medicine.”
The Bank of England’s three-month-old plan encourages banks to provide cheap credit to companies and households, which contrasts with the trickledown effect of gilt purchases through QE. A rethink by policy makers will reach a climax this week as they assess new forecasts and the impact of a program that’s left them with almost a third of the gilt market.
The nine-member Monetary Policy Committee will probably leave the target for asset purchases at 375 billion pounds ($602 billion) on Nov. 8, according to 35 of 45 economists in a Bloomberg News survey. Six forecast a 50 billion-pound increase, and four anticipate a 25 billion-pound expansion.
Officials’ disenchantment with QE has become increasingly apparent, with minutes of their October meeting showing that some members questioned the impact future gilt purchases could have. The central bank said last week it had completed the final tranche of its latest 50 billionpound round of bond- buying.
In a speech last week, Bank of England Deputy Governor Charlie Bean said consumers’ and businesses’ concerns about the outlook may undermine the impact of QE. In September, Deputy Governor Paul Tucker said the asset-purchase program no longer has “the same bite.”
Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. are among banks that have abandoned forecasts for more QE this week, citing comments by policy makers. Even with bond purchases falling out of favor, the economy may still need support. BOE Chief Economist Spencer Dale said the 1 percent surge in third- quarter gross domestic product might not be sustained and there could be a “sharp fall back.”
Goldman Sachs Group Inc. said in a Nov. 2 note that its conviction that the MPC will expand QE this week is “relatively low.” It changed its forecast for more stimulus on Nov. 8 to 25 billion pounds from 50 billion pounds.
“While we continue to see the need for more easing, it looks increasingly likely that any further action will take the form of additional ‘credit easing’ rather than QE,” Goldman economists including Kevin Daly in London said.
Governor Mervyn King introduced the FLS in June as a “coordinated action” between the central bank and the Treasury to fight the “black cloud of uncertainty” related to the euroarea crisis that has stifled Britain’s economy.
The program, which began on Aug. 1 and could boost credit by at least 80 billion pounds, allows banks to borrow treasury bills from the central bank to fund lending into the economy. Lenders will have 18 months to use the facility and then up to four years to repay. The central bank said last month that 30 financial institutions had signed up to the FLS, including Lloyds Banking Group Plc and Barclays Plc.