BOE May Cap Bond Plan as U.K. Exits Slump, CBI Says

By Brian Swint

Sept. 23 (Bloomberg) -- The Bank of England may stop buying bonds when it completes its current 175 billion-pound ($286 billion) plan as the U.K. shakes off the recession, the Confederation of British Industry said.

Gross domestic product will rise 0.3 percent in the third quarter, the biggest U.K. business lobby said in a report today, reversing a June prediction for a drop of the same size. The CBI forecast 0.4 percent growth in the last three months of the year and said the central bank will start raising the benchmark interest rate in the first half of 2010.

“Armageddon has receded somewhat over the horizon,” Richard Lambert, CBI director general and a former Bank of England policy maker, told reporters at a briefing in London yesterday. “But the recovery will be slow and protracted. Unemployment will continue to rise.”

The central bank plans to complete its current program to buy bonds by November. While Governor Mervyn King joined a minority bid to raise the plan to 200 billion pounds in August, he supported the current amount this month in a unanimous vote by the policy-setting panel for no change.

“At this stage, we don’t see the need for additional quantitative easing,” CBI Chief Economic Adviser Ian McCafferty told reporters. “It’s clear that quantitative easing has not yet had much of an impact on the wider economy.”

2010 Forecast

The economy will expand 0.9 percent in 2010 after a 4.3 percent contraction this year, the CBI said. The total drop in output in the recession will be 5.5 percent, close to the 5.9 percent of the recession in the early 1980s, the report showed.

King and David Miles this month switched sides and voted for no change in the bank’s bond purchase plan, arguing that consensus was better for now even though a higher amount may be warranted, minutes of the Sept. 10 decision released by the central bank today in London showed.

The CBI predicts the central bank will raise the benchmark interest rate to 1 percent in the second quarter from the current record low of 0.5 percent. The rate will stand at 2 percent by the end of next year, according to the CBI’s forecasts.

House prices will fall 9.8 percent this year before rising 0.8 percent in 2010, and unemployment will peak at about 3 million from the current level of 2.5 million, the CBI said in its forecasts.

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