BOE May Keep 175 Billion-Pound Bond Plan as U.K. Lags

By Jennifer Ryan

Sept. 10 (Bloomberg) -- Bank of England policy makers will probably keep pursuing their 175 billion-pound ($289 billion) emergency stimulus program today as the British economy shows signs of lagging behind the global recovery.

The central bank, led by Governor Mervyn King, will reiterate the size of its plan to buy bonds with newly created money, according to all 35 economists in a Bloomberg News survey. Policy makers will also keep the benchmark interest rate at a record low of 0.5 percent, all 60 economists in a separate survey said.

Prime Minister Gordon Brown wants to avoid complacency and keep up stimulus measures as the economy shows “encouraging” signs, his spokesman said yesterday. The Organization for Economic Cooperation and Development last week predicted a “modest” recovery for the world’s industrialized economies, though the U.K.’s slump will be worse than previously forecast.

“The bank is waiting to see how things pan out,” said Jonathan Loynes, an economist at Capital Economics Ltd., a London-based research group founded by former U.K. Treasury adviser Roger Bootle. “It’s the outlook for the economy that matters, and that’s not showing signs of picking up.”

The Paris-based OECD, which seeks to coordinate policy across its 30 member nations, said Sept. 3 that the U.K. economy will contract 4.7 percent this year, more than the 4.3 percent slump it forecast in June. The organization predicted economic contraction of 3.7 percent for the Group of Seven, compared with the 4.1 percent it projected previously.

‘Encouraging Signs’

Brown sees “interesting and encouraging signs” on the economy, his spokesman Simon Lewis said yesterday, though he “feels strongly about the need to keep recovery going by maintaining the appropriate level of expenditure.”

U.K. services expanded in August at the fastest pace since September 2007, according to a survey by Markit Economics, and Nationwide Building Society’s consumer confidence index rose to the highest in more than a year. Markit’s survey of manufacturers still showed contraction after growth in July.

House prices rose for a second month in August as low borrowing costs lured homebuyers, a report by Halifax today showed. Values in the U.K. climbed 0.8 percent to an average of 160,973 pounds, the division of Lloyds Banking Group Plc said in a statement. Prices were 7.6 percent lower than a year earlier.

The pound dropped against the dollar and the euro today. It fell 0.2 percent to $1.6515 as of 9:56 a.m. in London, after earlier rising to as high as $1.6566. Sterling eased to 88.14 pence per euro.

Minority Vote

King has shown caution on the recovery. He sought 200 billion pounds in asset purchases last month in a minority vote backed by David Miles and Timothy Besley, who left the panel on Aug. 31. In June 2007, when King last dissented from the majority because he wanted an interest-rate increase, the panel supported it at the next month’s decision.

King has remained concerned about the dearth of bank lending, and said last month there is still “a very long way to go” before banks will have rebuilt enough capital. Royal Bank of Scotland Group Plc and Barclays Plc, two of Britain’s biggest banks, have cut lending even after promising the government to make more credit available.

“The Bank of England is trying to hurry the process along a bit, but what the debate comes down to is whether the monetary intervention measures which the bank and others have put in place are actually working,” said Peter Dixon, an economist at Commerzbank AG in London. “In normal circumstances they probably would, but these aren’t normal circumstances.”

Gilt Yields

Deputy Governor Charles Bean said on Aug. 25 that the results of the bank’s purchases so far have been “moderately encouraging” and that gilt yields are as much as 75 basis points lower than they would otherwise be. He said that it is still “very early to draw conclusions” on the plan’s efficacy.

The yield on the 10-year gilt closed at 3.76 percent yesterday, up from 3.02 percent at the start of the year. The yield fell as low as 2.933 percent on March 13, two days after the central bank said it would start its asset purchase program.

Investors speculated this week that the Bank of England would cut the interest rate it pays on reserves it holds, in a new move to encourage financial institutions to lend more instead of hoarding money at the central bank.

“Markets are contemplating a change to the remuneration rate on reserves at the bank,” said Philip Shaw, chief economist at Investec Securities in London. “It is incorrect to look at the raw reserves data and conclude that banks are simply parking their funds there. What’s more likely is that the Bank of England keeps everything on hold for now.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net