BOE May Debate Bigger Bond Plan at November Meeting, Gieve Says

By Svenja O’Donnell and David Tweed

Oct. 8 (Bloomberg) -- Bank of England policy makers will consider expanding their bond purchase plan when they review its progress in November on concern the economy’s recovery may be a “false dawn,” former Deputy Governor John Gieve said.

The “next decision point” will be the Nov. 5 meeting, Gieve said in a Bloomberg Television interview on Oct. 6. The Monetary Policy Committee will keep the asset purchase plan at 175 billion pounds ($278 billion) at their decision today, according to all 42 economists in a Bloomberg News survey.

“The immediate risk that they’ll be very aware of is a false dawn,” said Gieve, who left the central bank at the end of February. Increasing the bond program next month, when the bank will have new economic forecasts, “will be an option they’ll look at pretty closely.”

Bank of England policy makers face conflicting signals on the strength of the economy as they assess whether Britain escaped the recession in the third quarter. Governor Mervyn King favored spending as much as 200 billion pounds at the August decision, and he opted for a consensus vote last month while insisting that more purchases could still be justified.

“We’re likely to see quite a difficult and slow recovery,” Gieve said. “Recovery back to the sort of growth we’re used to may be quite slow. Banks will take some time.”

Gieve’s caution on the economy echoes the minutes of the central bank’s decision last month, where policy makers noted that “promising indications” from asset markets could signal “false dawns.” The outcome of the bank’s meeting today will be released at 12 p.m. in London.

‘Bit of a Bounce’

The U.K. economy shrank 0.6 percent in the second quarter, less than previously estimated, and the National Institute of Economics and Social Research says gross domestic product stopped falling in the three months through September. Other reports this week showed services expanded at the fastest pace in two years last month and consumer confidence rose.

“I am expecting a bit of a bounce in the output figures in the second half of this year, but does that mean that the recovery is well established?” Gieve said. “You’ve got quantitative easing, you’ve got very low interest rates. After all that, it should cause a bounce.”

The economy is also showing some signs of persisting weakness. Manufacturing production slumped in August to the lowest level since 1992, the statistics office said this week.

Main Risk

“The main risk, short term, is that everyone thinks the recovery is over, we tighten too quickly, and we see a sort of ‘W’ emerge,” Gieve said. “The manufacturing figures are a reminder that it’s too early to say it’s definitely over.”

King was defeated in August in his bid to expand the bond purchase program by 25 billion pounds more than the majority wanted. Policy maker David Miles, who supported King at that decision, said last week that the plan is helping to revive the U.K. economy and will be reversible when recovery is secured.

The bank has been buying assets since March, when it cut its benchmark interest rate to a record low of 0.5 percent. The bank will keep the rate unchanged today, according to all 58 economists in a Bloomberg News survey.

Policy makers must avoid the mistake of keeping the rate too low once the recovery is established, Gieve said.

“Long term, the main risk is that we do what the Fed did after the 2000 dot-com boom, which is to cut rapidly, which is the right thing to do, but then tighten it slowly,” he said. “I’d expect to see quite a fast tightening of policy once recovery is genuinely established. But I’m not assuming a recovery is established yet.”

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; David Tweed in London at dtweed@bloomberg.net.