Bank of England keeps options open for recovery

By JANE WARDELL

posted: 16 HOURS 35 MINUTES AGO

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LONDON -The Bank of England warned Tuesday that the British economy still faces "profound challenges," fueling speculation that the central bank may not yet be done with boosting the money supply via asset purchases.

The comments from Bank Governor Mervyn King led to a fall in the British pound against the U.S. dollar, but economists said the wider message from King and his fellow policy makers' testimony to lawmakers was that the central bank is keeping all of its options open.

King said that if the outlook for inflation — currently well below the government's 2 percent target at 1.5 percent — "is even more on the downside than we thought, then of course we would return to the question and ask ourselves whether we should carry out more asset purchases."

But Adam Posen, a Washington, D.C.-based academic who is one of the newer members of the bank's nine-strong Monetary Policy Committee, suggested that the bank may be wrapping up its bond purchases.

"One hopes that we are coming to the end of the large-scale quantitative easing exercise," Posen told lawmakers, referring to the scheme in which the central bank buys assets from banks to boost the supply of money.

The pound was down 0.2 percent at $1.6573 early afternoon in London amid ongoing uncertainty about the bank's future direction.

The delicate situation facing policy makers at the Bank of England as Britain emerges hesitantly from recession has been reflected in split votes at the central bank's monthly meeting on monetary policy.

The nine-strong Monetary Policy Committee voted last month to increase its asset purchasing program, also called 'quantitative easing', by 25 billion pounds to 200 billion pounds.

But minutes of the meeting published last week revealed a three-way split in the vote, with one member wanting a bigger increase and another member calling for no increase at all.

King said the debate was to be expected at this stage in the recovery path.

"It's not surprising when you're at a turning point that you get differences of view," he told the cross-party Treasury Committee in a scheduled testimony on the bank's quarterly inflation report.

"On balance, the comments by MPC members to the Treasury Committee suggest to us that the Bank of England is keeping all of its policy options open, but would prefer not to extend its quantitative easing program unless the economy suffers a major relapse in 2010 following a probable return to growth in the fourth quarter of this year," said IHS Global Insight economist Howard Archer.

Britain remains officially in recession, wallowing behind recoveries in other major economies like the United States, Japan and Germany. Gross domestic product contracted 0.4 percent in the third quarter.

Revised figures, which include more data on the same quarter, are due to be released on Wednesday, but economists still expect them to show a contraction, albeit a potentially smaller one.

The Bank of England expects Britain to formally exit recession in the fourth quarter, then grow 2.2 percent next year and 4.1 percent in 2011 — forecasts that many economists consider optimistic.

"You should expect pretty buoyant growth rates in the short run, given that we're coming from such as strong downturn," King told lawmakers. "It's actually not a particularly strong recovery."

King said that over a two to three-year period, the bank would likely raise interest rates from the current record low of 0.5 percent and sell assets purchased during its emergency plan.

"The difficult judgment, which is the overriding problem, is to know by how much and when to do it," he said.

Selling the assets the bank has bought under the quantitative easing program and raising interest rates should have similar effects, King said, without specifying which the bank would do first.

2009-11-24 08:48:21