Bank of England Resists Calls to Add More Monetary Stimulus

Bank of England officials resisted calls to extend economic stimulus as they attempt to navigate a path between accelerating inflation and a faltering recovery.

The nine-member Monetary Policy Committee, led by Mervyn King, maintained the target of its bond program at 200 billion pounds ($319 billion), a move forecast by all but one of 41 economists in a Bloomberg News survey. It also held the benchmark interest rate at a record-low 0.5 percent today, as predicted by all 57 economists in a separate poll. The pound rose against the dollar after the announcement.

Central banks are refocusing on bolstering growth, with the Bank of Canada saying yesterday there is a “diminished” need for it to raise rates and Sweden's Riksbank abandoning a planned tightening. While two U.K. policy makers who were calling for rate increases dropped that position last month, the Bank of England may be reluctant to do more so-called quantitative easing with inflation more than double its target.

“With inflation elevated and expected to rise further, the bar is relatively high to start another round of asset purchases,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “I think they want to wait for more incoming data before making a real decision to do more QE.”

Stimulus Calls

The U.K. Institute of Directors said today the bank should expand its asset-purchase plan by 50 billion pounds to prevent the economy slipping back into a recession after reports showed manufacturing and services weakened in August. The British Chambers of Commerce is also pressuring the central bank to do more to help the economy, saying there are “arguments” for additional stimulus.

The pound rose as much as 0.4 percent against the dollar after the central bank's decision. It traded at $1.6039 as of 12:10 p.m. in London after earlier falling to $1.5913, the weakest level since July 13.

The central bank will publish minutes of today's policy meeting Sept. 21. Beaumont said they will show “the discussion has become more intense whether to do more QE or not.”

Morgan Stanley said yesterday that the Bank of England, European Central Bank, Federal Reserve and Bank of Japan may take concerted action to tackle weak growth and falling equity prices as soon as this week's Group of Seven nations meeting.

“The negative feedback loop between weak growth and soggy asset markets makes a coordinated monetary policy easing move more likely,” economists including Joachim Fels said in a research note.

ECB Decision

The ECB will hold its benchmark at 1.5 percent when it announces its policy decision at 1:45 p.m. in Frankfurt, according to all 57 economists in a Bloomberg survey. President Jean-Claude Trichet will speak 45 minutes later.

Since the MPC's August meeting, when some members said there was a case for more stimulus, global stocks have fallen amid fears of a renewed recession. Yields on the debt of Spain and Italy have soared as European leaders failed to restore investor confidence in their ability to end the region's debt crisis.

Chicago Fed President Charles Evans said yesterday the U.S. central bank should consider adding “very significant amounts of policy accommodation.” Chairman Ben S. Bernanke is due to speak on the economy today and President Barack Obama will address Congress on jobs.

Growth Slows

In the U.K., economic growth slowed to 0.2 percent in the three months through August, the National Institute of Economic and Social Research said yesterday, while the cost of insuring British bank debt has risen to levels seen in September 2008, when Lehman Brothers Holdings Inc. collapsed.

Dixons Retail Plc said yesterday that same-store sales fell 7 percent in the 12 weeks through July 23 and it scaled back investment plans. Still, Chief Executive Officer John Browett said revenue at the end of the period was “encouraging.”

“There are very serious headwinds that this economy and other economies around the world are facing,” said Azad Zangana, an economist at Schroders Investment Management in London. “Households need to continue to deleverage and that in itself means consumption will remain subdued at best.”

Faster inflation is adding to pressure on the economy by squeezing Britons' spending power. Even with price growth heading toward 5 percent, more than double the central bank's 2 percent target, Goldman Sachs Group Inc. and Citigroup Inc. have said that the Bank of England will resume asset purchases by November.

Stimulus Barrier

Another barrier for the central bank doing more stimulus stems from questions on what it would achieve. So far the bank has acquired about 198 billion pounds of gilts to lower borrowing costs, with the rest in corporate bonds and commercial paper.

The yield on 10-year government bonds was at 2.33 percent today, after falling to a record-low 2.24 percent last month.

“The growth numbers aren't going to get better quickly,” Walker at RBS said. “But we find it hard to believe that the committee would choose the moment that inflation is set to peak around 5 percent to restart asset purchases unless events forced them into action. Once inflation starts to fall in 2012, the hurdle for more QE is much lower.”

--With assistance from Jennifer Ryan in London. Editors: Fergal O'Brien, Simone Meier

To contact the reporters on this story: Scott Hamilton in London at shamilton8bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1bloomberg.net