money

LONDON, Feb 10 — The Bank of England (BoE) may have to pump more money into Britain’s fragile economy, Governor Mervyn King said today after the central bank forecast inflation would stand well below target in two years.

Presenting the BoE’s quarterly Inflation Report, King said recovery from the worst recession since World War Two would be slow with output below pre-crisis levels for some time to come.

And that gloomy outlook excluded the likelihood of fiscal policy being tightened hard after an election expected on May 6.

The pound fell and government bonds rallied as investors bet it would be a long time before the BoE started raising interest rates from their record low of 0.5 per cent — and could even boost its 200 billion pound asset-purchase scheme.

“It is far too soon to conclude that no more purchases will be needed,” BoE Governor Mervyn King told a news conference.

“So the Committee will keep its options open, and further purchases will be made if they prove necessary to keep inflation on track to meet the target in the medium term.”

The BoE has halted its asset purchase scheme — quantitative easing — after almost a year of buying mostly gilts with newly-created money to revive an economy which only emerged from an 18-month recession at the end of 2009.

In a sign that conditions are improving, the National Institute of Economic and Social Research said on Wednesday that growth picked up in the three months to January to 0.4 percent from just 0.1 percent in the final quarter of 2009.

Few analysts had expected the BoE to expand its QE scheme further this year but King’s comments make clear the Monetary Policy Committee has not decided one way or the other.

The Inflation Report cited a range of views among the MPC about the risks to inflation — suggesting the decision to keep policy on hold this month may not have been unanimous.

“There may well have been a split vote on the Committee — some members voting for further QE,” said George Buckley, an economist at Deutsche Bank.

Minutes of this month’s meeting are published on Feb 17.

The central bank’s forecasts show that inflation, which it is charged with keeping at 2 per cent, would stand at around only 1.2 per cent in two years — the usual policy horizon — if interest rates start going up later this year.

Inflation is seen below 2 per cent even if rates stay put.

“The door to further policy action is still wide open,” said Jonathan Loynes, economist at Capital Economics.

The economy, meanwhile, recovers only very slowly, with output not returning to pre-crisis levels until around mid-2011, according to the forecasts. GDP growth is seen at a rate of around 3.5 per cent in two years’ time.

The BoE emphasised a high degree of uncertainty over the outlook, picking out the future of government spending and taxes after the election as one key risk.

The opposition Conservatives are favourites to win and have promised a budget within 50 days of taking office that would tighten policy quicker than the ruling Labour Party’s plans.

Markets have been getting jittery about the prospect of a hung parliament where no party has an overall majority or the mandate to force through fiscal consolidation measures.

King said a consensus on the need to cut the deficit meant such an outcome would not be an issue for the MPC and dismissed the idea Britain may lose its top credit rating or could face a Greek-style debt crisis, as suggested by the Conservatives.

He also gave short shrift to speculation he was in collusion with any political party about plans to keep interest rates low — something the Conservatives have also mooted.

“Much remains in the air, depending on what the fiscal stance will be after the forthcoming election,” said Rob Carnell of ING.

“A tighter fiscal stance than implied by the pre-budget report might well see the Bank of England keeping rates on hold for far longer than markets currently expect, which should keep sterling under even more downward pressure.” — Reuters