Bank of England to put stimulus on hold in close vote

LONDON Tue Nov 6, 2012 3:26pm GMT

Pedestrians pass The Bank of England in the City of London February 14, 2012. REUTERS/Olivia Harris

Pedestrians pass The Bank of England in the City of London February 14, 2012.

Credit: Reuters/Olivia Harris

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LONDON (Reuters) - The Bank of England is likely on Thursday to opt for a pause in bond purchases aimed at boosting the economy after Britain exited recession and some rate-setters voiced doubts about the policy's bite.

The central bank has bought a total of 375 billion pounds- worth of British government bonds since the 2007-08 financial crisis, completing the latest round of purchases last week.

Economists have been paring back expectations of more buying, or quantitative easing, in November since data showed late last month surprisingly strong GDP growth between July and September.

Central bankers are pinning great hopes on a new scheme to get credit flowing through the ailing economy.

But the decision is expected to be close, with analysts polled by Reuters last week seeing a 40 percent probability of additional asset purchases this month, as the economic recovery looks fragile and surveys show signs of a fresh downturn.

"They'll probably sit on their hands," former Bank deputy governor John Gieve said at a recent event by Fathom Consulting, adding that four of the nine Monetary Policy Committee members might call for another round of stimulus.

One-off factors helped the economy grow by 1 percent in the third quarter after three quarters of contraction, beating forecasts for 0.6 percent expansion.

Policymakers have since warned that growth could falter between October and December.

Data has also shown growth recovery may be tentative. British industrial output fell more sharply than expected in September and Purchasing Manager Indexes have been poor.

However, the Bank's chief economist Spencer Dale noted that inflation was sticky, while deputy governor Charlie Bean said that fears over the future were crimping spending and investment, lessening the benefit of QE to Britain's economy.

Meanwhile, fellow MPC member Martin Weale said early last month that another round of QE might not be "compatible" with the central bank's inflation target, and that he did not see a definite case for further monetary stimulus.

Most importantly, the Bank's Governor Mervyn King has talked about the limits of monetary policy as a tool to revive the economy.

"When he is the pivotal dove on the MPC, if he's expressing those kinds of concerns, then I think that means we won't get any QE," said Brian Hilliard, economist at Societe Generale.

The BoE's decision is due at 1200 GMT on Thursday, and if the central bank holds fire as expected, attention will turn to its quarterly inflation and growth forecast update in the Inflation Report, which King will present on November 14.

NOT OVER YET

However, more QE further out is not off the table yet, with the Reuters poll pointing to another 50 billion pounds' worth sometime after November to support the fledgling recovery.

October surveys of purchasing managers suggested that the economy was broadly flat at the start of the fourth quarter.

And official data showed that wider industrial output, which includes energy production and mining, fell more sharply than expected in September, raising the risk of tough times ahead.

Moreover, the euro zone debt crisis continues to dampen demand for British exports and a deterioration in the area could prompt the central bank to pump more cash into the economy.

For now, rate-setters are likely to wait for the effects of the Funding for Lending Scheme -- which provides cheap funding to banks if they keep lending -- to come through before deciding on more QE, and that may take another few months.

And as doubts about QE's effectiveness intensify, so is a debate about what else the Bank could do next.

Suggested alternative policies range from cutting the benchmark interest rate further to buying bad assets from banks or packages of loans to small and medium-sized firms and residential mortgages to encourage lending.

(Editing by Jeremy Gaunt.)

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