BOE May Hold Bond Purchases at 200 Billion Pounds

By Jennifer Ryan

Dec. 10 (Bloomberg) -- The Bank of England will probably today stick to its plan to spend 200 billion pounds ($326 billion) on bonds as officials seek to cement Britain’s recovery from recession.

The Monetary Policy Committee, led by Governor Mervyn King, will keep the purchase program unchanged, according to all 38 economists in a Bloomberg News survey. Policy makers said last month they may also consider trying to stoke lending with a reduction in the rate paid on commercial bank deposits. The bank will announce today’s decision at 12 p.m. in London.

Bank of England policy makers expanded the emergency bond plan last month after Britain unexpectedly stayed mired in the longest recession on record in the third quarter. Chancellor of the Exchequer Alistair Darling said today the recession hasn’t ended, a day after he proposed measures to aid growth amid a record budget deficit.

“Darling and King both see the recovery as being fairly tentative at the outset and the need to maintain the stimulus that’s in place at least for the next year,” said David Tinsley, an economist at National Australia Bank who used to work at the central bank. “There’s an outlying risk that they move on the deposit rate, but our view is that if they want do anything more at all they’ll wait.”

The bank will keep its benchmark interest rate at a record low of 0.5 percent, according to all 53 economists in a Bloomberg News survey. The Swiss National Bank kept its benchmark, the three-month Libor target, at 0.25 percent, as forecast by all 16 economists in a Bloomberg News survey.

‘Open Mind’

The Bank of England has now spent more than 187 billion pounds of newly created money on bonds. The bulk of its purchases have been in gilts, with the rest on corporate securities.

King said last month he had an “open mind” on further bond purchases as he weighed the risk that withdrawing stimulus too soon will jeopardize the recovery. Policy makers said at the November decision that the next “most natural time” to assess the plan will be in February, when they produce new economic forecasts.

The economy may now have escaped the recession. An index of service company growth stayed close to a two-year high in November, the Chartered Institute of Purchasing and Supply and Markit Economics said last week. Gross domestic product rose 0.2 percent in the quarter through November, an estimate by the National Institute of Economic and Social Research shows.

Tesco Plc, the world’s third-largest retailer, is seeing “improving customer confidence and encouraging trends in both the U.K. and our international businesses,” Chief Executive Officer Terry Leahy said in a statement this week.

Darling’s Forecast

Darling predicted yesterday that the economy will expand as much as 1.5 percent next year after contracting 4.75 percent in 2009. He pledged to increase income taxes as the recession drives up U.K. government borrowing, and said today spending cuts are in store.

“We’re not out of recession yet,” he told BBC Radio 4 today. “A reduction in spending, that will be done in an orderly way, it will be tough.”

The U.K. will increase gilt sales to a record 225.1 billion pounds in the year ending March 2010. Gilts advanced after the announcement yesterday, though today the yield on the 10-year bond rose 9 basis points to 3.753 percent as of 8:51 a.m. in London. The pound rose 0.4 percent to $1.6284.

While the Bank of England has been trying to keep a lid on yields with its purchases of government bonds, it has also pursued other measures to ensure the recovery.

The bank said last week it will consider selling corporate bonds it purchased to improve market liquidity. While conditions in the new issue, or primary, bond market have improved, buying and selling of company bonds in the secondary market is “somewhat restricted,” it said.

Deposit Rate

Policy makers also discussed cutting the deposit rate last month to spur lending. While they said it was “unlikely to have a significant impact on the outlook,” they said that it “could ease monetary conditions further” and might be something they would consider in future.

“There won’t be any change at the Bank of England this month, though there may be some discussion of other measures,” said Jonathan Loynes, an economist at Capital Economics in London. “They won’t want to slam on the brakes when the economy hasn’t emerged from the recession.”

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