November 15, 2018

Bank of England Chief Joins Minority Favoring Asset Purchases

Minutes of the bank’s last meeting, released on Wednesday, also reveal the central bank is thinking about how to boost non-bank lending to the economy.

The pound fell to an 8-month low as the bank confirmed it was in no hurry to force inflation back to its 2 percent target.

“The (policy) committee agreed that it was important to communicate clearly its willingness to bring inflation back to the target over a longer time horizon than usual,” the minutes said.

Britain’s economy has been stagnant for two years, but the central bank now sees a sluggish recovery. Unemployment data released at the same time as the minutes again showed a record number of people in work.

Many economists had largely written off the chance of more asset purchases – or quantitative easing (QE) – especially after King last week stressed that monetary policy was near the limits of what it could do to boost growth. He also forecast inflation would remain above target until early 2016, even without additional stimulus.

But it now turns out that at the central bank’s February 6-7 Monetary Policy Committee meeting, King and Paul Fisher, the bank’s executive director for markets, joined long-standing dove David Miles in arguing for an increase in bond purchases to 400 billion pounds ($618 billion) from 375 billion pounds.

“A case could … be made for undertaking additional asset purchases at this meeting,” the minutes of the nine-member committee said. “The degree of slack in the economy, and the likely positive response of supply capacity to increased demand, meant that higher output growth would not necessarily lead to any material additional inflationary pressure.”

The policy committee also said that they still believed that asset purchases had the ability to help the economy by lowering interest rates and encouraging investment in riskier assets.

February marks the fourth time King has been in a minority since he became governor in 2003. While unusual, it is not the shock it would have been be at most other central banks as MPC members are encouraged to make differences in view public.

The last time King was in a minority was in June last year – when there was also a 6-3 split – and in July a majority of the MPC joined King in backing a 50 billion pound increase in asset purchases.

“February’s UK MPC minutes provide another clear demonstration of the committee’s increasingly flexible approach to inflation targeting,” said Samuel Tombs of Capital Economics. “More QE is likely this year, particularly if GDP growth continues to fall short of the Committee’s expectations.”

Economists polled by Reuters after the minutes saw a median 51 percent chance that the bank will restart asset purchases this year, up from 35 percent last week and the first time the probability has been above 50 percent since October.

QUALIFIED QE

The support in the minutes for further asset purchases was more nuanced than in the past, however. The three policymakers supporting purchases were only calling for a modest 25 billion pounds extra – in contrast to the increases of 50 billion pounds that were more typical in the past.

And there was a general acceptance – in line with King’s recent comments – that monetary policy alone will not get Britain’s economy back on track.

The minutes cited the importance of the central bank’s Funding for Lending Scheme, which opened in August and offers banks cheap finance if they lend more, as well as reiterating a call for British banks to strengthen their capital positions.

But there was also a hint that the bank may be looking at a new way to boost lending that bypasses banks.

“In addition to improving the supply of bank credit, the committee thought that consideration of measures to support the flow of credit more broadly, including from non-bank lenders, was also warranted,” the minutes said.

The central bank also said it would disregard upward price pressures from higher university tuition fees and energy levies.

Long-range communication is an approach favoured by Bank of Canada Governor Mark Carney, who will take over at the BoE when King steps down in July. Berenberg Bank economist Rob Wood said he expected more of this to come.

“We suspect the BoE’s toe in the water on guidance will get more specific over the coming months. Specifically, we expect any further easing to be in the form of something closer to Fed-style guidance accompanied by more QE,” Wood said.

(Additional reporting by Costas Pitas and Li-mei Hoang. Editing by Jeremy Gaunt)

Article source: http://www.nytimes.com/reuters/2013/02/20/business/20reuters-bank-bond.html?partner=rss&emc=rss

British Inflation Jumps on Food and Tuition Costs

LONDON — Only just out of recession, Britain’s fragile economic recovery is running into another familiar problem: inflation.

Annual consumer price inflation jumped to 2.7 percent in October from 2.2 percent the previous month, according to official figures released Tuesday, dampening prospects that the Bank of England would move to stimulate the economy in the short term, at least.

The data from the Office for National Statistics reflected increases in university tuition fees and in food prices but did not take into account some of the latest increases in energy bills, which look set to push the headline inflation figure higher in coming months.

Inflation remains an Achilles’ heel of the British economy.

Unlike its neighbors inside the euro, Britain saw its currency fall significantly on world markets after the financial crisis, resulting in imported inflation as the exchange rate pushed up the prices of non-British goods.

Rising commodity prices and increases in the value-added tax, a consumption tax, have also played their part in stoking British inflation, which hit a peak of 5.2 percent in September 2011.

The inflation data complicate the picture for the Bank of England, which has cut interest rates to a record low of 0.5 percent and spent £375 billion, or $593 billion, on purchases of financial assets to try to stimulate growth. Last week the bank decided to keep rates and the asset-buying program, known as quantitative easing, unchanged.

The rise in inflation is likely to strengthen the hand of members of the Bank of England’s Monetary Policy Committee who are resisting more stimulus, according to a note from Steven Bryce, European economics analyst at Credit Suisse.

“Some of the increases in electricity and gas prices introduced in October did not show up in this month’s index,” he wrote. “This means that inflation was above expectations even without this component.” He said the data suggested that, once the increases in electricity and gas prices are included over the next two months, consumer price inflation “could be above 3 percent.”

But Robert Wood, chief U.K. economist at Berenberg Bank in London, said that growth remained a central concern and that the case for further stimulus of the British economy might only be delayed into next year.

Despite the fact that gross domestic product in Britain rose 1 percent from July to September, taking Britain out of recession, Mr. Wood, like many analysts, says that underlying growth is extremely fragile.

“There is a risk that the economy returns to contraction in the fourth quarter,” he said. “We believe that growth remains weak and that the case for policy stimulus will grow next year.”

Inflation is likely to hit 3 percent before falling back, he said, adding that one of the main factors pushing up the latest figures — tuition fees — was the result of government policy and therefore revealed little about the underlying economy.

Andrew Sentance, senior economic adviser to PricewaterhouseCooper and a former member of the Bank of England’s Monetary Policy Committee with a reputation for being hawkish on inflation, said that consumer price increases remained “stubbornly above the 2 percent target.”

Further increases would reinforce the squeeze on British consumers and “add to concerns about the Bank of England’s ability to achieve its price stability objective,” he said in a statement.

“If above-target inflation persists through next year, it will add to the pressure” on the central bank “to raise interest rates sooner rather than later,” Mr. Sentance said.

This article has been revised to reflect the following correction:

Correction: November 13, 2012

A headline on an earlier version of this article misidentified a commodity that was reflected in Britain’s higher inflation numbers. It was food, not fuel. The earlier version also misstated when British inflation hit a recent peak of 5.2 percent. It was September 2011, not “in September.”

Article source: http://www.nytimes.com/2012/11/14/business/global/british-inflation-jumps-on-food-and-tuition-costs.html?partner=rss&emc=rss