Bank of England Did Not Extend Asset Purchase Program at This Time

February 4, 2010

The Bank of England

  • Kept the British Bank rate at 0.5%, its level for the past eleven months.
  • Agreed to maintain the stock of asset purchases funded by central bank reserve creation unchanged at Gbp 200 billion.  Such was last raised in November by Gbp 25 billion, and those operations were completed in January.
  • Said that “further [asset] purchases would be made should the outlook warrant them.”

A statement released by the nine-person  Monetary Policy Committee gave an unconvincing prognosis that sustained economic recovery will persist, which rests almost exclusively on a rebound of global demand and a weaker, and hence more competitive, pound.  The pick-up in consumer spending may stem from temporary factors.  Business investment is still contracting.  Value-added tax was just raised, lifting CPI inflation.  Credit conditions will remain “restrictive.”  Public and private sector balance sheets need to be strengthened.  Wage growth is “subdued.”

The view on inflation is that it will eventually settle back below 2% due to the economy’s considerable slack.  But such spiked to 2.9% in December and will rise further in January, provoking a public  letter of explanation to the Chancellor of the Exchequer for why it is one percentage more away from target.

I had felt the decision on asset purchases was a very close call and suspect from the downbeat tone of the statement that the vote not to buy more now drew some dissenting votes.  Minutes get released on February 17, and the latest inflation and growth projections will be unveiled next Wednesday.  The Bank of England stimulated massively, cutting its key interest rate from 5.0% at end-3Q08 to 0.5% within five months (including reductions of 150 basis points in November 2008 and 100 bps the next month) and then undertaking a huge amount of quantitative easing.  All of such failed to ignite as solid a recovery in Britain as in other G-7 economies, nor did it prevent an alarming slowdown in money growth.  But seeing the problems besetting Greece and the general unforgiving mood of the bond markets, a majority of the committee did not want to chance easing further now just as many other central banks are reversing their stances.

All this puts sterling in difficult circumstances.  If one wants to be upbeat about its prospects, history shows that sterling rarely marches to an intuitive drum.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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