BOE Should Pause Bond Plan as U.K. Recovery Looms, BCC Says

By Scott Hamilton and David Tweed

Jan. 12 (Bloomberg) -- The Bank of England should pause its bond-purchase plan after completing the current 200 billion- pound ($323 billion) tranche as the economy shifts toward a recovery, the British Chambers of Commerce said.

“The Bank of England has done as much as it can at this stage,” David Frost, director general of the BCC, told Bloomberg Television in London yesterday. “If it emerges in the spring and towards the middle of the year that the economy is not sustaining itself, then we have to come back and look to see where we need additional money pumped in.”

Confidence about sales at manufacturers and services companies rose in the fourth quarter to the highest level since the first three months of 2008, before the onset of the recession, the BCC said in a survey released today. The data shows the economy is on the brink of exiting the slump, the lobby group said.

The Bank of England last week pledged to complete its bond program as policy makers gauged the strength of the economic recovery against a backdrop of political squabbles on how to cut the nation’s budget deficit. Prime Minister Gordon Brown yesterday told his ruling Labour Party lawmakers that they can still win this year’s general election.

The index for manufacturing domestic sales rose to 3 from minus 10 in the previous three months, and the index for export sales climbed to 20 from zero, the BCC’s report showed.

For service companies, the domestic sales index slipped 1 point to minus 2, while the exports index increased to 8 from 6, the BCC said. The survey covered more than 5,400 companies.

‘Primary Concern’

“There was an improvement in the economy, but it’s not at the rate that we saw in the third quarter,” Frost said. “There was a sharp improvement in the third quarter, but it’s not been maintained. That’s got to be a primary concern.”

The lobby group, which has supported policy makers’ moves to expand the bank’s asset-purchase program to its current size, said the plan hasn’t done enough to aid bank lending, which is now a key obstacle to sustaining the recovery.

Economic reports paint a mixed picture of the U.K.’s route out of recession. Consumer confidence fell in December by the most in more than a year as expectations for the economy deteriorated, Nationwide Building Society said Jan. 6. Manufacturing activity increased to the strongest in more than two years, and mortgage approvals rose to the highest since March 2008, separate surveys showed on Jan. 4.

Bank of England policy makers last week kept the benchmark interest rate at a record low of 0.5 percent to nurture the recovery. They will next assess the effectiveness of their monetary policy in February, when officials produce quarterly economic forecasts.

“I don’t expect them to put up interest rates any time soon,” David Kern, chief economist at the BCC said in an interview. “They will not do anything until September. My focus is that by the end of the year, they’ll be 1 percent. They’ll be 2.5 percent by the end of 2011.”

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; David Tweed in London on jtweed@bloomberg.net.