July 24, 2013 / 3:25 PM / 5 years ago

BoE to turn to forward guidance as way ahead

LONDON (Reuters) - The Bank of England will probably turn to issuing forward guidance as its main policy tool but has yet to draw a definite line under its massive asset purchase programme, a Reuters poll found on Wednesday.

An actor in a bowler hat is silhouetted in front of the Bank of England during the filming of a television programme in central London September 19, 2008. REUTERS/Luke MacGregor

Canada’s former central bank chief Mark Carney took over at the Bank this month and wasted no time telling markets they were getting ahead of themselves with bets on when policy might tighten.

“The key ammunition for the new Bank Governor in his early days has, as expected, come from his forward-looking guidance on growth and rates,” said Lena Komileva at G+ Economics.

Still, 30 of 47 economists in this week’s poll said the central bank had yet to rule out topping up with more money the 375 billion pounds of bonds already purchased.

The Bank has already bought the equivalent of around a third of Britain’s gross domestic product in government bonds.

But only around a fifth of economists polled expect any increase in these purchases. A majority identified the issuing of forward guidance as a preferred policy option for the Bank to adopt.

“With further asset purchases ruled out at least in the near term, the Bank is instead expected to focus on improving communication via forward guidance of monetary policy,” said Melanie Bowler at Moody’s Analytics.

Britain’s economy was stuck in a rut for over two years but official data due on Thursday is expected to show growth picked up to 0.6 percent in the three months to June although that pace will ease to between 0.3-0.5 percent per quarter through to the end of next year.

Britain only narrowly missed an unprecedented triple-dip recession. With the government pressing ahead with its deficit reduction plans the Bank is the only main economic support.

Thirty-eight of 50 economists said more stimulus was needed but the consensus shows no change to the bond purchase programme or to Bank Rate, which has held at a record low of 0.50 percent for more than four years.

As in all recent polls no change is seen at all through to 2015, the end of the forecast horizon.

In June three members of the nine-person Monetary Policy Committee again voted for more QE - including retiring Governor Mervyn King - but all of them voted for no more purchases this month.

The two remaining MPC members who had previously supported buying more bonds said that although more help for the economy was warranted, it made sense to hold fire until the central bank had decided whether to provide clearer guidance on future interest rates - itself a form of stimulus.

“Although one should never say never, the odds are tilting against a further expansion (in QE),” said Peter Dixon, economist at Commerzbank.

“I am not enamoured of the view which implies that guidance is a new magic tool which central banks can deploy to make things suddenly better. But to the extent that it is a fairly costless strategy with limited potential to distort markets, it can’t hurt to try it.”

Polling by Rahul Karunakar and Sarbani Haldar; editing by Stephen Nisbet

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