BOE Should Cap Bond Plan This Week, Julius Says

By Brian Swint and David Tweed

Nov. 3 (Bloomberg) -- The Bank of England should cap its bond purchase plan at 200 billion pounds ($328 billion) this week in a signal that it will stop buying assets in the next quarter, former policy maker DeAnne Julius said.

“I would, at this meeting, ask for a small extension, say 25 billion, just to have in our back pocket in case we need to use it,” Julius said in a Bloomberg Television interview in London yesterday. “But I’d be aiming to use it at a diminishing rate and looking at February to pause completely.”

While the program has failed to help the economy return to growth, shutting it down right away would shock investors, Julius said. The U.K. central bank will expand the program to 225 billion pounds from the current 175 billion pounds on Nov. 5, according to the median estimate of 48 economists in a Bloomberg News survey.

“It’s hard to say quantitative easing is being that effective,” Julius said. “It’s very important that the Bank of England not create its own shocks for this economy. The patient is fragile.”

Policy makers, led by Governor Mervyn King, extended the program by 50 billion pounds for a second time in August after starting the program in March with a 75 billion-pound target. The benchmark interest rate has been at a record low 0.5 percent for eight months.

Second Bailout

The pound fell as much as 0.7 percent today against the dollar after the government announced a second bailout for Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. The U.K currency traded at $1.6329 as of 9:17 a.m. in London.

U.K. gross domestic product fell 0.4 percent in the third quarter, the statistics office reported Oct. 23. That’s the sixth consecutive contraction, the longest streak since records began in 1955.

“There is definitely a global recovery under way,” Julius said. “In the U.K., it doesn’t seem to be as prevalent as elsewhere, if we believe the latest evidence on GDP estimates. But we’re certainly seeing it here too.”

While the central bank’s bond-purchases have helped bring down yields on government bonds, they haven’t done much to bolster the economy, Julius said. Lower interest rates and the depreciation of the pound will be enough to put the economy back on track, she said.

“We’ve got to phase it out very gradually,” Julius said. “We have to be careful about just how we do that because there’s so much uncertainty.”

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; David Tweed in London at dtweed@bloomberg.net.