King Resists Stimulus as U.K. Shows Resilience

By Scott Hamilton and Jennifer Ryan - Jan 12, 2012 8:02 PM GMT+0700
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Mervyn King, governor of the Bank of England. Photographer: Chris Ratcliffe/Bloomberg

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Jan. 12 (Bloomberg) -- Trevor Williams, chief economist at Lloyds Bank Corporate Markets, discusses U.K. interest rates and the prospect of further stimulus from the Bank of England. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Bank of England Governor Mervyn King refrained from adding to emergency stimulus again today as policy makers await new forecasts and the economy showed some resilience heading into 2012.

The Monetary Policy Committee maintained its bond-purchase target at 275 billion pounds ($421 billion) in London today, which was forecast by all but one of 41 economists in a Bloomberg News survey. Citigroup Inc. and Royal Bank of Scotland Group Plc (RBS) are among banks saying it will increase the amount next month when current purchases end. The central bank has been buying about 5.1 billion pounds of gilts a week since October.

U.K. services and manufacturing gauges unexpectedly rose last month, signaling the economy gained some strength. Still, Bank of England officials have said the economy is probably stagnating as Europe’s debt crisis weighs on the recovery, and their November forecast for slowing inflation signals that more quantitative easing will be needed.

“Some of the data looks better, but we’re probably already in recession,” said Alan Clarke, an economist at Scotia Capital Europe in London. “They will expand QE in February, the only question is how much. I would expect 50 billion pounds.”

Bond Yields

The prospect of further bond purchases is weighing on the pound, which fell for a second day against the euro to 83.11 pence. Against the dollar, it was up 0.1 percent at $1.5348 as of 1 p.m. in London.

Bonds stayed lower after the Bank of England’s announcement, with the yield on the 10-year gilt up 1 basis point to 2.02 percent. U.K. gilts have risen as investors sought refuge from the euro-area crisis, with the 10-year yield falling to a record-low 1.93 percent on Dec. 30.

The Bank of England also kept its benchmark interest rate at a record-low 0.5 percent today. The European Central Bank kept its key rate at 1 percent today. ECB President Mario Draghi will speak at a press conference in Frankfurt at 2:30 p.m.

While the U.K. economy grew the most in a year in the third quarter, the outlook has since darkened. U.K. manufacturing dropped 0.2 percent in November from the previous month, data today showed. The Bank of England cut its 2012 growth projection in November, a month after it increased its QE target by 75 billion pounds. Prime Minister David Cameron, whose government is cutting spending to narrow the budget deficit, said on Jan. 5 this will be a “difficult year.”

Job Cuts

Rising unemployment is undermining consumer demand in the U.K. Royal Bank of Scotland said today it will cut about 4,800 jobs. It didn’t say how many would be lost in Britain. Tesco Plc (TSCO), the U.K.’s largest supermarket chain, reported Christmas sales that missed analyst estimates and said full-year profit will be at the “low end of the current consensus range.” There will be “minimal” growth in earnings next year, it said.

Bank of England policy makers will publish new growth and inflation projections next month. They have forecast that inflation, at 4.8 percent in November, will slow “sharply” this year. Based on its current stimulus, the central bank sees consumer-price growth at 1.7 percent at end of 2012, below its 2 percent goal, and 1.3 percent at the end of 2013.

James Knightley, an economist at ING Group in London, said the inflation forecast “means further stimulus will be required.”

‘Poor’ Prospects

“Consumer spending is being constrained by negative real wage growth and rising job insecurity,” he said. “Add in the fact that the external environment is not good news for exports and that firms are reluctant to invest in such an uncertain economic backdrop, and we believe that growth prospects remain very poor.”

The central bank expects the current round of QE to be finished in February. In the minutes of their December meeting, some MPC members said more may be needed. Still, they noted that “market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way.”

Clarke at Scotia said that a 50 billion-pound increase to the bond target in February that’s completed over three months would produce about the same weekly rate of purchases as the current round, which extended over four months.

Lower borrowing costs have helped to support the economy. A U.K. index of services rose to the highest in five months in December, while Britain’s benchmark FTSE 100 Index has gained about 4.9 percent in the past month.

There are also signs of strength in the U.S., the world’s largest economy. Payrolls growth beat forecasts in December and the unemployment rate dropped to the lowest in almost three years. Indexes of manufacturing and services strengthened.

“The data looks a bit better than people were expecting,” said David Tinsley, an economist at BNP Paribas SA in London. “But I still think” the Bank of England is “going to go. The data can take some improvement and it’s still justified to do more QE in February.”

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net