BOE Leaves Rate at 0.5%, Continues Pace of Bond Plan

By Brian Swint

April 9 (Bloomberg) -- The Bank of England left the benchmark interest rate unchanged and said it will keep buying government bonds to fight the deepest recession in a generation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the main rate at 0.5 percent, the lowest since the bank was founded in 1694, as predicted by 60 of 62 economists in a Bloomberg News survey. The panel also agreed to continue the three-month program to purchase 75 billion pounds ($110 billion) of assets to bolster the economy, the bank said.

“The committee noted that since its previous meeting a total of just over 26 billion pounds of asset purchases had been made and that it would take a further two months to complete that program,” the Bank of England said in a statement.

The U.K. economy is shrinking at the fastest pace since 1980, threatening to push inflation below the Bank of England’s 2 percent target and eventually stoke deflation. While Chief Economist Spencer Dale says growth may return at the end of the year, investors have called on King to keep up the pace of bond purchases to push down yields and ease credit markets.

This month’s meeting is “a stocktaking exercise to see how the purchases are going and see the impact on yields,” said Grant Lewis, head of fixed income research at Daiwa Securities in London. “Rates are as low as they’re going to go. When we get closer to spending the 75 billion, then we’ll think about what happens next if it doesn’t have the desired effect.”

Doubts

The pound was little changed after the statement and traded at $1.4648 at 12:17 p.m. in London.

King stoked doubts about his intentions when he indicated March 24 that officials may not spend all the money available to them. The yield on the 10-year gilt, which dropped to the lowest in at least 20 years after the plan was originally unveiled last month, has since risen about 0.4 percentage point to 3.32 percent. The yield was little changed after today’s decision.

“It was a missed opportunity,” said Alan Clarke, an economist at BNP Paribas SA in London. “We’ve run out of interest rate ammunition, and it would have been a cheap and easy way to intervene verbally and get gilt yields down. It’s a bit disappointing.”

The Bank of England’s plan was hailed as a model for other central banks to follow when it was announced on March 5. Today’s decision was the first since so-called quantitative easing began.

Global Rates

The Federal Reserve kept its benchmark at a range of zero to 0.25 percent on March 18. The European Central Bank last week cut its rate a quarter-point to 1.25 percent.

ECB council member Ewald Nowotny said in an interview that cutting the benchmark rate below 1 percent is still “open for discussion,” though he said didn’t favor doing so. He also said it would be “sensible” for the bank to buy corporate debt.

Recent reports have indicated that the economy’s downward spiral is slowing. A gauge of services industries rose to a six- month high in March and Nationwide Building Society’s measure of house prices climbed for the first time in more than a year. The Bank of England has also said that financial institutions expect credit conditions to ease.

There are “some encouraging signs” that the bond-purchase program is smoothing access to loans, and the economy should show “signs of recovery” around the turn of the year, Dale said on March 27. At the same time, “near-term prospects are bleak.”

GDP Drop

U.K. unemployment jumped the most since 1971 in February and the National Institute of Economic and Social Research estimates gross domestic product dropped 1.5 percent in the first quarter. That follows a 1.6 percent fourth-quarter contraction, the biggest since 1980.

Michael Page International Plc, the U.K.’s second-largest recruitment company, said on April 7 that first-quarter profit slumped 32 percent as the pace of layoffs increased. Laura Ashley Holdings Plc, the U.K. furnishings and clothes chain known for floral patterns, said March 31 annual profit fell 49 percent as Britons spent less to furnish their homes.

King said March 24 he expects inflation, which accelerated to 3.2 percent in February, to resume its “sharp” slowdown. The bank two months ago forecast that the inflation rate will fall to 0.3 percent in 2011.

U.K. producer prices increased 2 percent in March, the slowest annual pace in 20 months, the statistics office said today.

“I can see interest rates staying very low until the end of next year,” said Jonathan Loynes, an economist at Capital Economics in London. “They don’t have much evidence yet to decide if they’re doing too much or too little. The next important decision is when the 75 billion runs out.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.