Blanchflower Says BOE May Expand U.K. Money-Printing

By Elliott Gotkine and Brian Swint

June 8 (Bloomberg) -- Former Bank of England policy maker David Blanchflower said the central bank may expand and widen its program of buying assets with newly created money as the British economy keeps shrinking.

The bank may seek to spend more than the 150 billion pounds ($240 billion) authorized by Prime Minister Gordon Brown’s government, as well as buying different types of bonds, Blanchflower said in an interview on Bloomberg Television. Britain will be mired in a recession for another year, he said.

The Monetary Policy Committee entered its fourth month of money printing last week and recommitted to spending 125 billion pounds. Blanchflower, the Dartmouth College professor who left the panel at the end of May, said that the biggest concern is still that the deepest recession since World War II will cause an extended drop in consumer prices.

“The 150 was just, if you like, a notional starting number,” Blanchflower said in a June 5 interview from Hanover, New Hampshire. “The forecast the bank produced essentially said that at constant rates, and with the amount of quantitative easing that we’ve actually voted for, that still doesn’t bring inflation back to target” at 2 percent.

“If you read it that way, the assumption would be there is more QE to come,” Blanchflower said.

The central bank in May predicted that the inflation rate is most likely to drop to around 0.4 percent by the end of this year and will reach only 1.2 percent in the middle of 2011.

Bond Program

So far, the Bank of England has bolstered the money supply by purchasing 77 billion pounds in government bonds with residual maturities of between five and 25 years. It had added 2.1 billion pounds in commercial paper and around 730 million pounds in corporate bonds on its balance sheet as of the end of last week.

“My expectation would be: look at the data, and if the data is not strong and growth isn’t coming, they could do more,” Blanchflower said. “They may decide they have to alter the type of gilts they’re buying or do rather more in commercial paper, but it’s really going to depend.”

The bank’s June 4 move to maintain the plan for 125 billion pounds of purchases and to keep the benchmark interest rate at a record low 0.5 percent “really is a ‘sit-and-wait-and-see decision,’” he said. The Treasury has given the bank authority to spend up to 150 billion pounds, and policy makers can vote to ask permission for more.

Recession Forecast

The U.K. economy contracted 1.9 percent in the first quarter, the most since 1979. The International Monetary Fund expects gross domestic product to fall by the most since at least 1948 this year.

Barclays Plc raised its forecast for GDP on June 4 after a report showing services industries unexpectedly grew for the first time in a year. The British economy will stop contracting in the third quarter, Barclays predicts.

“I’d be surprised to see a positive quarter of growth in 2009,” Blanchflower said. Expansion probably won’t resume “until the second quarter of 2010. Certainly the labor market is going to be pretty terrible for quite a long time.”

For the global economy, “there are some positive signs,” Blanchflower said. “But they’re not exactly strong. It certainly doesn’t look as if we’ll be leaping into a strong recovery this year.”

With the U.K. in recession, inflation slowed to a 15-month low of 2.3 percent in April, down from a peak of 5.2 percent in September. Blanchflower said he’s less concerned about accelerating inflation in a few years than the possibility of a period of falling prices.

Deflation Risk

“We have the tools to deal with rising inflation,” he said. “Obviously we still have the interest-rate tool, and then you can just reverse the purchases of gilts. You can sell them again. The bank knows exactly what to do on the upside. The worry always, in all of this, is deflation.”

Blanchflower suggested that turmoil surrounding Brown’s government, which the prime minister reorganized on June 5 after a spate of resignations, may have unsettled investors. Brown’s Labour Party came third in European Union elections last week, behind the Conservatives and the U.K. Independence Party.

“Uncertainties about government and government policies don’t help,” he said. “There has been some weakening in the pound. The markets don’t like uncertainty. We will see.”

Blanchflower, whose term ended on May 31, often disagreed with Governor Mervyn King. In 36 interest-rate meetings, he voted for a reduction 19 times, favored no change on 16 occasions and wanted an increase only once.

That vote for a higher rate in May 2007 was a “mistake,” Blanchflower said in an article on the Guardian newspaper’s Web site published yesterday. “The hope is that the mistakes that were made by the Monetary Policy Committee on the downside will not be repeated on the upside,” he wrote.

To contact the reporters on this story: Elliott Gotkine in London at egotkine@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.