Bank of England should be ready pump out more money, OECD says

LONDON Thu Feb 7, 2013 6:58am GMT

LONDON (Reuters) - The Bank of England should buy more bonds and the government's fiscal policy should be "flexible" if Britain's economy remains weak, the Organisation for Economic Co-operation and Development said on Wednesday.

It added that monetary policy should be the primary tool to help the economy past short-term weakness.

The Paris-based economic think tank forecasts that Britain's economy will grow just 0.9 percent this year after shrinking by 0.1 percent in 2012.

"Overall, in the current economic situation, further expansion of the asset purchase programme would be warranted if the economy stays weak," the OECD said in a survey of the British economy.

The OECD's call may fall on deaf ears at the Bank of England, however.

Several of its top policymakers have questioned the effectiveness of another round of government bond buying, known as quantitative easing and only one has called for more.

The Bank of England has so far spent 375 billion pounds on British government debt as it tries to get the UK economy going again. The economy has suffered two recessions in the last four years and could be on the verge of another one.

The central bank's policy direction could change later this year when its next governor, Mark Carney, currently head of the Bank of Canada, takes over on July 1. He is due to address a parliamentary committee on Thursday.

In its report, the OECD said alternatives to buying more government bonds, such as a further cut in interest rates by the Bank of England below their historically low level of 0.5 percent or buying private securities, "do not appear to have clear advantages over expanding QE".

Acknowledging the risks and potentially diminishing returns of bond buying, the OECD said those risks were limited in Britain due to the government's "determined action" to cut the budget deficit.

The OECD said the focus on cutting the deficit was appropriate but the government should be flexible if growth proves significantly weaker than expected in the months ahead.

The report said the euro zone crisis was high among factors that could hit Britain this year.

(Reporting by William Schomberg Editing by Jeremy Gaunt)