BOE refrains from expanding stimulus as recovery assessed

Credit Program

Those recent signs may have reinforced the position of the six-member majority on the MPC that has been resisting King’s push to expand QE on concern that such a move may stoke inflation expectations. Consumer-price growth was 2.8% in March, above the BOE’s 2% target.

Nevertheless, with the economic recovery not yet assured, the BOE and the U.K. Treasury expanded their Funding for Lending Scheme last month to boost credit to small- and medium-sized businesses. British Prime Minister David Cameron said today that the FLS has been “effective.”

In its statement, Niesr said its GDP estimate was inflated by the weak level of output in January. “Underlying growth is weaker than the headline figure suggests,” it said.

More Stimulus

Other major central banks are adding to stimulus. The Reserve Bank of Australia cut interest rates this week and Poland’s central bank lowered its benchmark yesterday.

The ECB cut its key rate to a record low of 0.5% on May 2 and extended a policy of unlimited bank lending to mid-2014 to help pull the economy out of a recession. The U.S. Federal Reserve said the previous day it will continue bond purchases until the labor market improves “substantially.”

The International Monetary Fund forecasts the U.K. economy will expand 0.7% this year, while inflation will average 2.7%. The U.S. will expand 1.9%, it said. The BOE will release new forecasts in its Inflation Report on May 15.

The forecasts might include a reduction in the outlook for the peak of inflation this year, according to BNP Paribas SA economist David Tinsley. In February, the BOE said that inflation would reach 3.2% in the third quarter.

At the same time, threats to the recovery remain. The euro- area economy, Britain’s biggest export market, will shrink 0.3% this year, according to the IMF. William Morrison Supermarkets Plc, the smallest of the U.K.’s four main supermarket chains, said today that it is “cautious on the economic environment and consumer spending.”

Chancellor of the Exchequer George Osborne, who says his strategy is “fiscal responsibility and monetary activism,” has laid the groundwork for Carney. He broadened the BOE’s remit to allow it more flexibility to add to stimulus and asked it to review the merit of forward policy guidance. Carney has said that central banks aren’t “maxed out.”

“Recent economic indicators have been more upbeat and the U.K. escaped the dreaded triple-dip recession, but economic growth remains far from ‘escape velocity’,” said Victoria Clarke, an economist at Investec Securities in London. “We see this as something Mr. Carney will push to achieve.”

Bloomberg News

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