Bank of England Halts Cash Boosts for Now

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on Nov 8, 2012

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Bank of England Halts Cash Boosts for Now

After a two-day discussion Bank of England’s Monetary Policy Committee voted not to buy more British government bonds and placed its hopes on the bank’s new lending scheme.

Governor Mervyn King said for now no additional funds to the £375 billion already spent will be pumped into the economy. The decision was forecasted by 35 of 45 economists in a Bloomberg survey, while the rest predicted an increase of as much as £50 billion.
Paul Tucker and Charles Bean, BOE Deputy Governors, both implied in recent speeches that the asset purchasing programme might not be having the desired impact on the economy. In compound to that inflation climbed to 2.2 percent in September and with energy costs increasing it is likely to stay above the 2 percent target throughout next year. Both Citigroup and Barclays forecasted there will be no further quantitative easing (QE) as a result of today’s meeting, basing their predictions on the third-quarter GDP data and the renewed signs of price pressure.

“The widespread expectation of unchanged policy marks a sharp turnaround from forecasts just a few weeks ago that QE would be expanded,” said Chris Crowe and Blerina Uruci, economists at Barclays in London. “This is partly due to evidence of firmer inflationary pressures.”
The decision is likely to have been a close call because of freshly released purchasing managers’ surveys, which reported slowdowns in the services, construction and manufacturing sectors in October. The surveys backed many experts’ opinions that the weakness in the economy was masked in the third-quarter by one-time events such as the Olympics and the rebound from the Diamond Jubilee weekend.

**Funding For Lending Programme**
Thirty groups including five of the largest UK banks have signed BOE’s Funding for Lending programme, designed to stimulate the economy by making cheaper loans available to firms and individuals. HSBC is the only one of the top six UK lenders not taking part as it says it needs no additional funding for lending.
!m[BOE and the ECB Intend To Keep Interest Rates At Current Levels](/uploads/story/752/thumbs/pic1_inline.png)Under the programme institutions can borrow the equivalent of 5 percent of their loan books immediately, and more if they meet certain conditions next year. “I am confident that the FLS [Funding for Lending Scheme] will help the supply of credit,” said Paul Fisher, BOE’s executive director for markets. “Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months,”

**ECB Keeps Interest Rate**
Today in Frankfurt the European Central Bank also announced it is keeping its main refinancing rate on hold at 0.75 percent in order to give its yet untested bond-buying programme more time to work.
“We always discuss all instruments of monetary policy, but the Governing Council decided … to keep interest rates unchanged. We have not discussed what we are going to do next year.” said President of the ECB Mario Draghi.
No country has yet applied for the Outright Monetary Transactions (OMT) scheme, which comes with fiscal conditions attached. “We are ready to undertake OMTs which will help to avoid extreme scenarios, thereby clearly reducing concerns about the materialization of destructive forces.” added Mr Draghi in his speech today.