Bank of England set to keep policy steady despite new remit

LONDON Thu Apr 4, 2013 12:17am BST

A man walks out of a passageway close to the Bank of England in the City of London March 15, 2013. REUTERS/Suzanne Plunkett

A man walks out of a passageway close to the Bank of England in the City of London March 15, 2013.

Credit: Reuters/Suzanne Plunkett

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LONDON (Reuters) - The Bank of England is unlikely to pump fresh money into Britain's stagnant economy on Thursday, despite a new remit that gives it extra leeway to disregard above-target inflation.

Chancellor George Osborne tweaked the central bank's mandate two weeks ago, giving it stronger backing to continue ignoring inflation when it overshoots its target due to one-off factors.

But only a handful of economists polled by Reuters last week expect the central bank to add this month to the 375 billion pounds of government bonds it bought between March 2009 and October 2012.

"For as long as you say there is a 2 percent inflation target, I think what we have got at present is about as close as you can get without breaching the spirit of that," said Ross Walker, UK economist at Royal Bank of Scotland.

Other economists only see a chance of more stimulus once Mark Carney - currently Canada's central bank chief - becomes governor of the BoE in July.

Carney is believed to favour other ways to help the economy such as long-term promises of low interest rates.

British inflation has mostly been above target since the start of the financial crisis due to one-off price shocks - for example, higher sales tax - and the Bank's desire to avoid a surge in unemployment by tightening policy prematurely.

Inflation rose to 2.8 percent in February, and the bank does not forecast it to fall below 2 percent until early 2016.

However, the economy has been stagnant over the past two years. After a 0.3 percent contraction in the last three months of 2012, it risks tipping into its third recession in less than five years.

That risk will be greater if a survey of the service sector in March, due at 0830 GMT(09:30 a.m. British time), shows the same decline as its counterparts for manufacturing and construction published earlier this week.

These conflicting pressures from high inflation and very weak growth help explain why the Bank's nine-member Monetary Policy Committee has been unusually split at its past two meetings.

The Bank's Governor Mervyn King, markets expert Paul Fisher, and external MPC member David Miles all voted for an extra 25 billion pounds of bond purchases, but failed to convince their other six peers.

Walker said he expected the impasse to continue. "If there wasn't enough to budge them in February, there's not enough to make them move tomorrow."

March's policy minutes did not suggest either camp's position was softening. Indeed some opposed to more stimulus saw a new reason: the danger that looser monetary policy could trigger a further slide in sterling.

Last month sterling hit a two-and-a-half year low against the dollar and was some 8 percent down since the start of the year, until the minutes and comments from King that the currency was fairly valued helped stem its slide.

However a slim majority of economists think the Bank will restart asset purchases - perhaps as soon as May, when fresh quarterly economic forecasts may sway waverers.

Failing that, the next milestone will the change of leadership at the Bank at the end of June.

"More stimulus should be on its way soon - although we may have to wait for Mr Carney to arrive first," said Vicky Redwood, UK economist at Capital Economics.

(editing by Ron Askew)

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