BoE looks set to call time on QE experiment

(Repeats to more subscribers)

By Sumeet Desai

LONDON, Feb 4 (BestGrowthStock) – Eleven months and 200 billion
pounds later, the Bank of England looks set on Thursday to
pause its unprecedented asset-buying scheme to boost the
economy in what could become the first step back to more normal
policy.

The jury remains out on whether it worked. Critics note the
economy grew by just 0.1 percent at the end of 2009 after an
18-month downturn that wiped out 6 percent of output and left
Britain as the last major country out of recession.

But others say the outcome would have been much worse if
the central bank had not pumped so much newly-minted money into
the economy by buying UK government bonds.

Either way, the overwhelming majority of analysts polled by
Reuters predict the BoE will announce no further increases to
this asset buying — quantitative easing or QE in the jargon —
when the Monetary Policy Committee meeting ends at 1200 GMT.

Policymakers also look sure to leave interest rates at a
record low of 0.5 percent and few analysts expect any upward
move until much later in the year.

And given the uncertainty about the economy — especially
as fiscal policy could end up being much tighter after an
election expected on May 6 — the BoE will probably want to
keep the door open to further QE if growth falters.

“We believe that the MPC are most likely to hold off from
further extending the QE programme on Thursday,” said Howard
Archer, economist at consultancy IHS Global Insight.

“However, we expect the MPC to keep the door ajar to
further QE by indicating that it is keeping all policy options
open and that it will be prepared to act if the economy fails
to develop recovery during the early months of 2010.”

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The BoE started QE — literally creating central bank
reserves to buy assets, mostly gilts — back in March 2009 when
the world economy was in the grip of the worst synchronised
downturn since the Great Depression of the 1930s.

The only similar previous example of such a move had been
in Japan in the part of the last decade. Many note the Japanese
economy has never really roared back to life.

But last year, the BoE, like many central banks around the
world, found it had no choice but to sail into previously
uncharted waters to prevent the economy sinking into the rocks.

So in March it cut interest rates to just 0.5 percent and
embarked on a 75 billion pound asset-buying programme. Another
50 billion pounds was added in May and in August, and then 25
billion pounds in November, taking the total to 200 billion.

The last of the gilt purchases required to meet these
targets was completed last week, and while the consensus is the
BoE will sit on its hands for now, some analysts believe there
is a chance the central bank could announce a further
expansion.

They argue that it will take a long time for economic
output to get back to pre-crisis levels and the coming fiscal
squeeze will make things worse.

Against that, however, many worry about the inflationary
impact of the extra money swilling around the economy.

Moreover, policymakers note it is the stock of QE that is
important — meaning the stimulus very much remains for now, it
is just not being added on.

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BoE looks set to call time on QE experiment