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Bank of England pledges to cover country with cash
King Says UK in Deep Recession, Pledges More Easing
By Svenja O'Donnell and Brian Swint
Wednesday, February 11, 2009
LONDON -- Bank of England Governor Mervyn King said the U.K. is in a "deep recession" that may force policy makers to create money and pump it into the economy after cutting interest rates to a record low.
"Further easing in monetary policy may well be required," said King at a press conference in London after presenting the central bank's revised quarterly forecasts today. "That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending."
Bonds jumped after the remarks, which mark a shift in focus to unconventional measures after the deepest rate cuts in the central bank’s history failed to stave off a recession that may be the worst since World War II. The yield on the two-year government bond fell 25 basis points to 1.36 percent.
"We now expect the Monetary Policy Committee to cut rates to zero at the March meeting and introduce quantitative easing," said Michael Saunders, chief Western European economist at Citigroup Inc. in London. That will probably include "purchases of a range of assets, including gilts but also private-sector assets."
The Bank of England's Monetary Policy Committee, which cut its benchmark interest rate to 1 percent this month, next meets to decide on rates on March 5. King, 60, said that policy makers can start using new tools before rates fall to zero because "we're getting to the point where the efficiency of further cuts is diminished."
"It was a very defeatist press conference," said David Tinsley, an economist at National Australia Bank on London and a former central bank official. "The fire has gone out of him a bit. There's not much left in the kitty."
King interrupted reporters and reprimanded some for not listening to what he had said in previous statements. He refused to apologize for failing to foresee the crisis, saying, "I'm not paid to forecast the future."
Prime Minister Gordon Brown has already given King authority to buy securities using government money and King today indicated officials may go beyond the existing plan.
Under quantitative easing, the bank would create money and use it to buy securities such as government and corporate bonds. That would boost liquidity in credit markets and increase the supply of money flowing through the economy.
"If we were to go to the wider operation, the MPC could decide that it wished to conduct such operations financed by the creation of central bank money," said King today.
The governor, reappointed for a second five-year term by Brown last year, is responding to criticism that the Bank of England hasn't acted fast enough to the crisis. Former policy maker Sushil Wadhwani said yesterday the central bank should adopt "shock and awe" tactics. Fathom Financial Consulting, a firm founded by a group of former central bank economists, yesterday urged the government to buy houses as a means to increase the money supply.
"We need quantitative easing, we need credit easing, and we probably need a bit more fiscal stimulus," Wadhwani said in an interview yesterday.
The deteriorating economy is eroding Brown's popularity, which fell to a six-month low in a poll published in yesterday’s Times newspaper. The Bank of England forecasts show the economy will contract at an annual 4 percent rate by the end of the first quarter. Unemployment rose to the highest since 1999 in January.
Support for Brown fell five points in the last month to 28 percent, while the Conservative opposition retained the backing of 42 percent of voters, a survey by Populus Ltd. showed.
The Bank of England said today it's concerned about a "more prolonged period of weak credit availability" if actions taken to stabilize the global banking system don't prove wholly successful. That's "a significant downside risk," the bank said.
Inflation will slow to 0.5 percent at the end of 2010, said the bank, which has a target of 2 percent.
"Given its remit to keep inflation on track to meet the 2 percent target in the medium term, the projections published by the committee today imply that further easing in monetary policy may well be required," said King.
Central banks are pushing rates towards zero across the globe, forcing them to use new tools to rescue their economies. Sweden’s central bank lowered the benchmark rate by a percentage point to 1 percent, twice as much as expected, and rates in the U.S. and Japan are already close to zero.
The Bank of England forecasts are based on market expectations of the benchmark rate falling from the current 1 percent to 0.7 percent in the third quarter. The bank publishes its quarterly predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week.
Britain faces the worst recession among Group of Seven nations, the International Monetary Fund forecasts. World growth will slow to 0.5 percent this year, the least since the end of World War II, the IMF said.
The U.K.'s inflation rate fell the most since at least 1997 in December. Consumer prices rose an annual 3.1 percent, compared with 4.1 percent the previous month.
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