BOE Officials Throw Money at Economy

Bloomberg (Link) - Svenja O�Donnell (November 5, 2009)

The Bank of England may increase its bond-purchase plan by 50 billion pounds ($83 billion) today as central bankers and politicians scramble to shore up Britain�s banking system and drag the economy out of recession.

Governor Mervyn King�s nine-member Monetary Policy Committee will expand the asset-buying program to 225 billion pounds at 12 p.m. in London, the median of 48 forecasts in a Bloomberg News survey shows. That follows Prime Minister Gordon Brown�s pledge this week to spend almost 40 billion pounds in a second bailout of two the nation�s biggest banks.

Any increase in the Bank of England�s emergency program would be the third since King unveiled the plan in March. Brown�s first bank bailout, the government�s fiscal stimulus measures and an injection of 175 billion pounds in newly printed central bank money have so far failed to end Britain�s longest recession on record.

�They�ve got to throw money at it,� said Neil Mackinnon, an economist at VTB Capital Plc and a former U.K. Treasury official. �The fact of the matter is that the U.K. economy is lagging behind. As to whether quantitative easing is working, the jury is still out.�

The central bank will keep its benchmark interest rate at a record low of 0.5 percent, according to all 60 economists in a Bloomberg survey. The European Central Bank, which also meets today, will maintain its main rate at 1 percent at 1:45 p.m. in Frankfurt, a separate survey showed.

Vote Split

The Bank of England�s bond plan already split the rate panel once this year when King�s push to increase the plan to 200 billion pounds was defeated in August. While he argued that being too cautious was less of a risk than spending too much, Chief Economist Spencer Dale says that there is a danger of stoking asset prices too much.

�It is a lot of money, but if it does restart the economy and gets it moving again then it�s worth it,� said George Buckley, an economist at Deutsche Bank AG in London. �It�s very difficult to say if quantitative easing is working, but it is doing something.�

Service industries showed the fastest pace of expansion since August 2007 in October in a survey by Markit Economics released yesterday, while Nationwide Building Society said that consumer confidence held at the highest level in 1 1/2 years.

Some economists say the pickup may have more to do with record-low interest rates than the bank�s bond purchases.

�Full Impact�

�When you have a 500 basis point cut in interest rates that is bound to impact the economy with a bit of a lag and that lag is coming to an end and we�re seeing the full impact now,� former U.K. policy maker DeAnne Julius said in a Bloomberg Television interview this week.

While the Bank of England says that one of the aims of the bond purchases is to increase the amount of money in the economy, a gauge of money supply favored by the bank fell an annualized 1.7 percent in the third quarter, the weakest reading on record.

�If reviving bank lending and in turn money supply growth is the objective, it�s clearly not working,� VTB�s Mackinnon said. �The evidence for any upturn in lending is still very tentative.�

Gross domestic product shrank 0.4 percent in the three months through September, dragging Britain�s recession into a record sixth quarter. By contrast, the U.S., German and French economies have all returned to growth.

Marks & Spencer Group Plc, the nation�s largest clothing retailer, said yesterday it�s �cautious� about the outlook for the next year. HSBC Holdings Plc, Europe�s largest bank, said this week it will cut 1,700 jobs in the U.K.

Brown�s Challenge

Brown is seeking to revive the banking system and the economy in preparation for an election due by June. He pledged this week to inject 31.2 billion pounds into Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, allowing the institutions to scale back dependence on state guarantees for their most toxic assets. The government also promised up to 8 billion pounds for RBS to use �in exceptional circumstances.�

�Every effort must be made to bring the recession to an end,� David Kern, economic adviser at the British Chambers of Commerce, said today. �The current economic situation -- in which our economy is still declining while other countries are already growing -- entails serious dangers and must not be allowed to continue.�

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