BOE May Buy 170 Billion Pounds of U.K. Gilts, JPMorgan Says

By Anchalee Worrachate

Feb. 26 (Bloomberg) -- The Bank of England may buy between 85 billion pounds ($121 billion) and 170 billion pounds of U.K. government bonds as part of its so-called quantitative-easing program, according to JPMorgan Chase & Co.

The central bank may start buying securities of all maturities as early as next month, said Francis Diamond, a fixed- income strategist in London at JPMorgan. Quantitative easing would entail the creation of money to be used for buying government and corporate debt, giving banks more cash to lend.

“We expect any gilt purchases to be done across the curve,” said Diamond, who based his estimate on similar action taken by the Bank of Japan starting in the late 1990s. “We don’t think they will favor one part of the market over another.”

Bank of England Governor Mervyn King said Feb. 11 the Monetary Policy Committee may pursue full quantitative easing if credit markets remain frozen. Policy maker David Blanchflower said yesterday that with interest rates already at the lowest in the bank’s history, there’s a risk non-conventional measures to revive the economy will be implemented too slowly.

The central bank cut its key interest rate to all-time low of 1 percent on Feb. 5, a reduction of 450 basis points since the start of 2008. The British economy shrank the most since 1980 in the final three months of last year as spending by consumers and companies shriveled, data showed yesterday.

The Bank of Japan held about 16.5 percent of the country’s government bonds by the time its quantitative-easing strategy ended in March 2006, Diamond said. About 515 billion pounds of U.K. government debt will be publicly traded by April 2010, JPMorgan forecast.

Buying 16.5 percent of the gilts in circulation by the end of the U.K.’s 2010 fiscal year would equate to about 85 billion pounds of securities, Diamond said.

“The lower bound of the range is based on the Japanese scenario and the upper bound is based on the fact that things could deteriorate significantly in the U.K.,” Diamond said.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net