LONDON (Reuters) - Having sat on its hands since last summer, the Bank of England is coming round to the view that it may need to do more to stop Britain’s stuttering economy lurching back into reverse.
A growing number of economists reckon another 25 billion pounds of government bond buying is in the offing, possibly as soon as this week’s meeting of the bank’s Monetary Policy Committee which ends on Thursday.
A Reuters poll of economists taken Feb 26-28 showed a 40 percent chance of the bank opting for more so-called quantitative easing this week and a 60 percent chance before the year is out.
Since the poll was conducted, an unexpected contraction of UK manufacturing in January and weak mortgage lending has made the March 7 decision an even closer call.
“We expect the Bank will vote to restart QE at the March meeting - or if not then, soon after,” said Michael Saunders, UK economist at Citi.
With fiscal policy hamstrung by the government’s austerity drive and banks continuing to shrink their balance sheets, hopes for an economic recovery lie squarely on the central bank’s shoulders.
In the past week, the drip-feed of dismal economic data has been accompanied by signs that policymakers are willing to consider more action, including more radical policy options, pushing sterling to its lowest level against the dollar since mid-2010.
Deputy governor Paul Tucker raised the controversial idea of the Bank charging banks to park money at the central bank, something that could spur them to lend more to companies in an attempt to boost growth. Tucker said it would be “an extraordinary thing to do” and his fellow deputy governor Charles Bean stressed there was no concrete plan to do it.
Britain’s economy has flat-lined over the last two years and is at risk of sinking into a triple-dip recession this quarter.
Its sluggish performance has come despite the Bank spending 375 billion pounds on gilts in the past three years. As a proportion of national income, the BoE’s QE effort far outstrips that of the Federal Reserve.
While many economists and businesses harbour concerns about the effectiveness of QE, the Bank still seems to think that while interest rates have gone as low as they can - at 0.5 percent -QE still has some mileage left.
Minutes to last month’s meeting showed three of the bank’s nine monetary policy committee members were already convinced of the need for more QE.
Tucker, who did not vote for more bond buying in February, said last week that “nobody on the committee thinks that QE has reached the end of the road and that it is not a useful instrument anymore.”
The fact that Governor Mervyn King was among those in favour of more bond buying is significant. The last time he was in the minority was last June and the following month he got his way.
When the Bank opts to increase QE, it typically conducts the gilt purchases over a three-month period. A relaunch of bond-buying this week would buy the bank time until July, when Bank of Canada Governor Mark Carney arrives to take over.
Carney has suggested he will favour a more activist approach to getting Britain’s economy growing again.
The fly in the ointment is Britain’s sticky inflation which is already well above the 2 percent target and looks unlikely to fall any time soon.
The fall in the value of the pound means dearer imports will only exacerbate price pressures.
So far, however, Bank policymakers appear to be comfortable with the currency’s weakness. Indeed, some economists suspect that their willingness to talk about unconventional policy stimulus may be a deliberate attempt to talk the currency lower and gain competitive advantage.
“There is the perception that the Bank will look through not just the short-term inflation outlook, but also the outlook for the next two to three years,” said Philip Shaw at Investec.
Reporting by Christina Fincher; Editing by William Schomberg and Robin Pomeroy