BOE Adds 50 Billion Pounds to Stimulus on Euro ‘Concerns’

By Jennifer Ryan and Scott Hamilton - Feb 9, 2012 7:45 PM GMT+0700

Bank of England officials pumped another 50 billion pounds ($79 billion) into the U.K. economy to protect a nascent recovery from the threat posed by Europe’s debt crisis.

The nine-member Monetary Policy Committee raised the target for bond purchases to 325 billion pounds, more than a quarter of current outstanding gilts, according to a statement in London today. The increase was forecast by 34 of 50 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion- pound increase and one no change. The MPC also held its benchmark interest rate at a record-low 0.5 percent.

The stimulus expansion suggests policy makers remain concerned that Europe’s failure to stem its debt turmoil poses a risk to Britain and may pull inflation below their 2 percent goal. While they noted an improvement in some business surveys last month, they said the growth outlook remains weak and that they had “concerns” about debt in some euro-area nations.

“They’re worried about risks to growth and they remain confident that inflation will fall below their target,” said Philip Rush, an economist at Nomura International Plc in London. “They need to explain why they’re still easing when the general environment seems to have improved so much.”

The pound rose after the announcement, and traded at $1.5867 as of 12:25 p.m. in London, up 0.3 percent from yesterday. Bonds fell, pushing the yield on the 10-year gilt up 3 basis points to 2.209 percent. The yield fell to 1.917 percent on Jan. 18, the lowest since Bloomberg began compiling the data in 1989.

Euro Concerns

“Some recent business surveys have painted a more positive picture and asset prices have risen,” the central bank said. “But the pace of expansion in the U.K.’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries.”

Greek Finance Minister Evangelos Venizelos headed to Brussels today as politicians in Athens try to reach agreement on austerity measures needed to secure a 130 billion-euro ($172 billion) bailout. Failure to agree could mean Greece defaults on a bond payment due in March and sparks contagion across the euro area, which buys almost half of British exports and where U.K. banks are exposed to more than $1 trillion of borrowings.

Chancellor of the Exchequer George Osborne said on Jan. 25 that Britain had “substantial economic problems” and “dealing with those problems is made more difficult by the situation in the euro zone.”

Investors Primed

The central bank will start the bond purchases on Feb. 13 and hold three 1.5 billion-pound auctions a week for three months. It will buy bonds in three maturities -- three to seven years; seven to 15 years; and longer than 15 years.

Policy makers had primed investors to expect another round of quantitative easing after they completed 75 billion pounds of bond purchases this month. King said Jan. 24 the central bank has “scope” to add to stimulus, while Adam Posen said last week there was a case for another 75 billion pounds.

The MPC’s decisions were based on new growth and inflation forecasts, which the central bank will publish on Feb. 15. Its November projections showed inflation slowing to 1.7 percent by the end of 2012. Annual consumer-price gains eased to 4.2 percent in December.

Cautious Companies

Britain’s economy shrank 0.2 percent in the fourth quarter, its first contraction in a year. The National Institute of Economic and Social Research, whose clients include the U.K. Treasury and the Bank of England, said the economy is back in recession and will shrink 0.1 percent this year.

Diageo Plc Chief Executive Officer Paul Walsh said today the London-based distiller is “cautious as to the consumer and economic trends we will face in 2012.” The maker of Guinness stout and Smirnoff vodka has sought to further its expansion outside Europe, where consumers are spending less amid the sovereign-debt crisis.

“A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy,” the central bank said. “But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.”

Positive Signs

Nevertheless, there are signs the U.K. economy is strengthening. A Feb. 3 survey showed services output grew the most in 10 months in January. Separate gauges last week indicated manufacturing returned to growth and construction continued to expand. Manufacturing production rose more than economists forecast in December, figures published today showed.

In the U.S., the world’s largest economy, the unemployment rate declined to 8.3 percent last month, the lowest since February 2009. Europe’s Stoxx 600 Index had its best January in 14 years and is up about 7.8 percent this year. London’s FTSE 100 Index has gained 5.6 percent since the start of the year.

“We could be nearing the end in terms of quantitative easing,” Peter Dixon, an economist at Commerzbank AG in London, said in a telephone interview. “Markets, at least for the moment, are stabilizing, and if the uncertainty which prevailed in the fourth quarter continues to lift, then I think the case for additional QE becomes more difficult. But to a large extent, it all hinges on the euro zone.”

The European Central Bank held its benchmark rate at 1 percent today, as forecast by 55 of 57 economists in another survey. The other two expected a cut to 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m. in Frankfurt.

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

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