LONDON (Reuters) - The Bank of England should be ready to buy more bonds if Britain’s economy remains weak, while the government does not need to rethink its deficit-reduction plan, the OECD think-tank said on Wednesday.
Instead, monetary policy should be the main tool to help the economy past short-term weakness, the Paris-based Organisation for Economic Cooperation and Development said, in contrast to the view of the International Monetary Fund.
After two years of stagnation and the risk of an imminent return to recession, there have been renewed calls from some economists and opposition politicians for Britain’s Conservative-led government to rein in its flagship austerity programme.
Last month the chief economist of the IMF said Chancellor George Osborne should look at scrapping some planned spending cuts due to persistent economic gloom.
The OECD shares the IMF’s downbeat outlook, forecasting on Wednesday that Britain’s economy will grow just 0.9 percent this year after shrinking by 0.1 percent in 2012.
But the OECD’s secretary-general, Angel Gurria, said that for now The Bank should be the main source of extra support for the British economy.
“The UK has its own currency, its own central bank and its own monetary policy. Therefore it has the capacity to go, if you will, the extra mile,” he said at a news conference hosted by Osborne at Britain’s finance ministry.
“Overall, in the current economic situation, further expansion of the asset purchase programme would be warranted if the economy stays weak,” the OECD added 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 (QE) and only one has called for more.
The Bank has so far spent 375 billion pounds ($588 billion) 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.
Economists expect no change in policy when The Bank concludes a two-day meeting on Thursday.
Its 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 British MPs 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 below their historically low level of 0.5 percent or buying private securities, “do not appear to have clear advantages over expanding QE”.
The OECD said those risks inherent in bond-buying by central banks 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, though monetary policy should be “flexible” if growth proved weaker than expected.
Gurria said he was not suggesting that Osborne rethink his deficit reduction plan. Insteadm the OECD only wanted so-called “automatic stabilisers” - the higher social spending and lower tax bills that naturally occur in a downturn - to be allowed to take effect.
This is already largely built into Osborne’s fiscal targets, which are largely calculated on a cyclically adjusted basis.
“It is not about changing the plan. It is about using the flexibility within the existing plan,” Gurria said. “The policy response in the case of the UK has been the appropriate one and it is being recognised and rewarded by the markets.”
($1 = 0.6382 British pounds)
Reporting by William Schomberg and David Milliken; editing by Jeremy Gaunt, Ron Askew