BOE chief awaits scrutiny on QE halt as UK relapse risk lingers
Bank of England Governor Mervyn King is preparing for tough questions on why policy makers halted its bond- purchase program at a time when the economy’s recovery isn’t yet assured.
King will face a hard time explaining why the central bank doesn’t plan to buy more gilts to stimulate growth as Britain tries to shake off a recession, said economists including Jens Larsen at RBC Capital Markets and Rob Wood at Berenberg Bank, both former BOE officials. He will brief journalists on Nov. 14 and testify to lawmakers in the coming weeks.
While Britain’s economy emerged from recession in the third quarter, the recovery remains under threat from the continued crisis in the euro area, the U.K.’s biggest trading partner, and cooling global growth. Against that backdrop, as well as the pressure from the government’s fiscal squeeze, King will have to explain why the MPC pulled the plug on what has been its main policy tool since 2009.
“They are facing a significant communications challenge here,” Larsen said in a telephone interview. “It will be difficult combining what may be a weaker outlook with trying to explain why they chose to halt QE.”
The Monetary Policy Committee said that it doesn’t plan to buy any more bonds beyond the 375 billion pounds ($599 billion) already purchased, concluding a third round of quantitative easing. Economists at Nomura International Plc and Barclays Plc said the move was likely to have split the nine-member MPC. The central bank will publish the minutes of the two-day meeting, showing how the committee voted, on Nov. 21.
The decision followed comments from BOE Deputy Governors Charles Bean and Paul Tucker that QE may not have the same impact as it did when it was introduced in 2009. It also suggests the bank may focus more on credit-boosting measures such as the Funding for Lending Scheme to ignite growth.
At the same time, increased inflationary pressures may also have prompted policy makers to hold fire. The Bank of England forecast in August that inflation would slow to below its 2 percent target by the end of next year. Recent energyprice increases have boosted the near-term outlook for inflation and the central bank may raise its forecasts next week. Still, Royal Bank of Scotland Group Plc says the projections will still imply a bias toward loosening. King will deliver an opening statement and then take questions at the press conference, when the bank will publish its quarterly Inflation Report.