King Gives BOE Room as Bernanke, Trichet Signal Exit (Update1)

By Brian Swint and Jennifer Ryan
Nov. 12 (Bloomberg) -- Bank of England Governor Mervyn King is keeping the door open to more emergency policy action just as his counterparts suggest they’re ready to rein it in.
King said yesterday he has an "open mind" on further bond purchases as he presented higher forecasts for economic growth and consumer prices. He signaled the central bank may still have room to expand its asset-buying program from the 200 billion pounds ($331 billion) currently planned because inflation will undershoot the 2 percent target in the two-year policy horizon.
The Federal Reserve, led by Chairman Ben S. Bernanke, has committed to scale down buying of mortgage-backed debt in the first quarter and European Central Bank President Jean-Claude Trichet signaled last week that some long-term financing auctions will end next month. Australia and Norway have started raising interest rates as the global economic slump ends.
"This cautious tone is aiming at keeping the options open for the Bank of England," said Sarah Hewin, an economist at Standard Chartered Bank in London. "They obviously still do feel that there are risks out there. They don’t want to feel that they can’t, if they need to, go for further asset purchases."
The bank’s decision pushed the pound down against all 16 of its most-traded peers tracked by Bloomberg. The British currency fell as much as 0.9 percent yesterday and traded at $1.6539 as of 9:12 a.m. in London. The yield on the two-year U.K.
government bond slipped 3 basis points today to 1.26 percent.

Pound View

Investors have become pessimistic about the pound for the first time since April on the view that the central bank will keept rates on hold until the second half of 2010, according to a survey of 1,558 Bloomberg users published yesterday. The currency will fall over the next six months, the survey showed.
King is weighing the risk that withdrawing stimulus too soon will push the economy back into recession against the danger that too loose a monetary policy might spark asset-price bubbles. While the forecasts show inflation may exceed the target in 2012, some economists say that’s not something the governor is ready to worry about now.
"I don’t think they’re concerned about inflation, whatever their charts say," said Geoffrey Dicks, chief economist at Novus Capital Markets. "I suspect that in their minds, they’ve finished with quantitative easing, but they’re not going to say that. They’re not going to rule it out."
The central bank, which publishes its forecasts as fan charts, said inflation will stay below its target for most of the next three years before edging above the goal. The rate dropped to 1.1 percent in September, the lowest in five years, as the recession purged cost pressures in the economy.

Bond Program

The Bank of England last week extended the bond-purchase program by 25 billion pounds, the smallest of three expansions since the plan started in March.
"We have a completely open mind as to whether to do more asset purchases or not," King told reporters at a press conference in London. He said that he’s not yet concerned about a renewed bout of asset bubbles.
King, viewed as one of the toughest inflation fighters before the financial crisis, may now be more content to stoke an economic "boom" to claw back the ground lost during the recession, Citigroup Inc. economist Michael Saunders said in a note to investors yesterday.

Citigroup Analysis

"Policy has been set to produce a boom to close the output gap in the next few years," Saunders wrote. The bank’s forecasts show that record-low interest rates and bond purchases will stoke a recovery twice as fast as those from the recessions of the early 1980s and 1990s, he said.
King’s stance suggests he’s reluctant to follow the Fed and the ECB in signaling that an end to emergency measures is close.
Trichet suggested last week that the ECB’s first exit step will be to let its 12-month auctions of unlimited cash lapse.
The Fed completed its $300 billion program of purchasing Treasuries last month and said Nov. 4 that it will purchase about $175 billion of agency debt, less than previously projected, through the first quarter of next year.
"The Bank of England doesn’t want to block itself into a corner," said Standard Chartered’s Hewin. "It’s a difficult period, this turning point for all central banks. Markets are focusing very much on when policy accommodation is going to be withdrawn."