Bank Of England Expands Quantitative Easing Program

The Bank of England will probably expand its so-called quantitative easing program as the debt crisis in Europe impedes the U.K.’s return to growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will raise its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds, according to 30 of 41 economists in a Bloomberg news survey. Eight predict an increase to 400 billion pounds, and the rest see a smaller increase or no change.

King told reporters that Europe’s debt turmoil has stoked uncertainty and tightened credit availability, creating headwinds to Britain’s recovery from recession. Policy makers may find it easier to act next month than they did at their June 7 decision after inflation slowed to 2.8 percent, the closest to their 2 percent target since November 2009.
“Growth is weak and inflation has come down, so that adds to the case for doing more quantitative easing,” said George Buckley, an economist at Deutsche Bank AG in London. “This could be the end of it, provided things pick up as we expect, though that’s still an open question.”

Officials voted 5-4 to keep their bond-purchase target at 325 billion pounds at this month’s policy decision. That defeated a push by King, Adam Posen and David Miles for a 50 billion-pound expansion, and Markets Director Paul Fisher’s bid for 25 billion pounds. The majority preferred to wait to assess the outcome of June 17 elections in Greece, the European Council summit that concluded yesterday and the results of the bank’s June 22 Financial Policy Committee meeting.
With no one party able to claim victory in Greece, the leading New Democracy party has been able to form a coalition on pledges to keep the country in the common currency while fighting for looser aid conditions from the euro area and the International Monetary Fund.
Euro-area leaders agreed early yesterday to ease terms on loans to Spanish banks and paved the way to a direct recapitalization of banks. The agreement sparked the biggest gain in the euro this year.

King yesterday presented FPC recommendations that financial institutions should dip into liquid buffers, a week after the central bank completed the first round of a new auction to give banks access to more cash. The move addresses concerns expressed by some officials this month that lenders were bolstering reserves with funds from their bond sales to the Bank of England.

Forty-nine of 50 economists in a separate Bloomberg survey see no change next week in the benchmark rate from the record low of 0.5 percent. One economist, Tom Vosa at National Australia Bank, forecast a cut to 0.25 percent, Bloomberg reported.