Bootle Says BOE Should Spend ‘a Lot’ More on Bonds

By Jennifer Ryan

Oct. 15 (Bloomberg) -- The Bank of England should expand its 175 billion-pound ($284 billion) bond-buying plan “as far as it takes” to fight off the threat of deflation, former Treasury adviser Roger Bootle said.

“They will have to go a lot further,” Bootle said in an interview. “In the first instance, they should be prepared to go another 50 billion, and maybe even another 100 billion, but the point is not that. The point is being prepared to go as far as it takes.”

It’s “uncertain” if the bank will extend the program at its policy meeting in November, markets director Paul Fisher said in an interview in the Financial Times. Bootle argues in his book published today, “The Trouble With Markets: Saving Capitalism From Itself,” that the financial crisis has left Britain vulnerable to deflation and a further slump in house prices, which have dropped about 13 percent from the peak.

“The U.K. market may have something like another 20 percent-odd to fall” in house prices, he said. “Perhaps things have fundamentally changed so that overdoes it a bit, and maybe it’s 15 percent. But it looks to us as though the market is going to edge a fair bit lower still.”

Bootle was on former Chancellor of the Exchequer Kenneth Clarke’s panel of economic forecasters, known as the “Wise Men,” under the Conservative government until 1997. He wrote a book called “The Death of Inflation” in the 1990s, and in his 2003 book “Money for Nothing” said the U.K. house-price boom was unsustainable. He is founder and managing director of Capital Economics Ltd., a London-based research group.

‘Absolutely Horrific’

“I look at the same valuation measures which I’ve looked at for years and caused me to identify a problem early on in the housing market, and they still look absolutely horrific,” Bootle said. “The housing market in the U.K., unlike in the U.S., still looks very expensive. It looks expensive in relation to earnings.”

Bootle reiterated his forecast that the benchmark interest rate, currently at a record low of 0.5 percent, will stay below 1 percent for five years. He said asset purchases will remain the sole tool for officials to stave off deflation.

Fisher told the Financial Times in an interview published today that the bank hadn’t decided to extend the program.

November Meeting

“People obviously are expecting us to stop at some stage, and so to a degree it will be priced into the market,” he said. “Whether we’ll (stop) in November or at some later date may be uncertain.”

Fisher’s remarks sparked the biggest increase in the pound versus the euro since March. Sterling rose as much as 1.69 percent to 91.84 pence per euro and 1.62 percent against the dollar to $1.6240 as of 11:19 a.m. in London.

British Chambers of Commerce Director General David Frost said in an interview earlier this week that the central bank should expand the program by “perhaps another 25 billion pounds.”

“There’s going to be very tough competition for jobs, and in that sort of environment pay inflation is going to get very low and stay very low,” Bootle said. “All they’ve got is quantitative easing. So if we saw the economy looking as though it’s moving toward deflation, the sensible response is to increase the scope of QE.”

Inflation Rate

The inflation rate dropped in September to 1.1 percent, a five-year low. That puts it 0.1 percentage point away from the floor set for the Bank of England by the government.

The recovery may be undermined if officials rush to pare the budget deficit, raise taxes and cut spending, Bootle said. Whichever party wins the general election due by June will face a deficit predicted by the Treasury to rise to a peacetime high of 12.4 percent of national income.

“As long as we put in place a credible plan to get the deficit and the debt down over a number of years, the last thing we need is a sort of panic assault on the issue which will run the risk of throwing us back in recession,” Bootle said.

Bootle said that he forms his views on economics by assuming prevailing wisdom is misguided.

“I always start with the proposition that the consensus view, the conventional view, is wrong,” he said. “‘All you’ve got to do, Bootle, is work out which way it’s wrong.’ It may sound trite, but actually it’s a very useful exercise.”

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