09 Apr 2009
April 9 (Bloomberg) -- Bank of England Governor Mervyn King is under pressure from investors concerned he may not honor his pledge to buy 75 billion pounds ($110 billion) in government bonds and risk undermining efforts to rescue the British economy.King's plan to purchase assets with printed money, hailed as a model for central banks around the world when it was unveiled a month ago, is losing traction. Bond yields rose after initially dropping to record lows and King stoked doubts about his intentions when he indicated March 24 that officials may not spend all the money available to them.
With the Bank of England today announcing its first monetary policy decision since quantitative easing started, King may have to reassure investors he's fully committed to a plan designed to haul the U.K. out of its worst recession since 1980. Asset purchases are now the main tool of officials boxed in by a benchmark interest rate already close to zero.
"The last comments from the Bank of England caused a lot of confusion and have significantly jeopardized the policy," said Sean Maloney, a fixed-income strategist at Nomura International Ltd. in London. "Greater clarity is all that's standing between quantitative easing being effective and falling short."
The Bank of England will leave its benchmark rate at 0.5 percent at 12 p.m. today in London, according to all but two of the 62 economists in a Bloomberg News survey. While the bank often doesn't release a statement when rates are kept unchanged, Nomura's Maloney says the new policy regime warrants one today.
Bond Plan
The Monetary Policy Committee voted last month to buy government and corporate bonds with newly created money and to spend half of the 150 billion pounds authorized by the Treasury within three months. The strategy aims to help the economy by pushing down long-term interest rates and boosting money supply.
"If they truly want to bring interest rates to a level that they think will stimulate spending in the economy they may have to move to unlimited gilt buying," said Axel Botte, a strategist at Axa Investment Managers in Paris, which manages about $800 billion. "Otherwise they may not be able to get yields down to the desired level."
Lauren Rosborough, a currency strategist at Westpac Banking Corp. in London, said yesterday that bond yields and falling house prices suggest the bank may need to double the current amount it plans to spend.
King has been more cautious. He said two weeks ago that the Bank of England "can't be precise" on how much it will spend and "we might need to do less if it works."
‘Big Worry'
"If they have already started to go cold on the idea, then that is a big worry," said John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London. "If they don't correct that impression then the market is going to keep on selling off."
Investors' enthusiasm has waned about the plan. The yield on the 10-year gilt has risen 42 basis points since touching 2.933 percent on March 13, the lowest since Bloomberg records began in 1989.
The early success of King's gilt purchases was one reason why the U.S. Federal Reserve decided to go ahead with a similar program for Treasuries. Janet Yellen, president of the San Francisco Federal Reserve Bank, said March 25 that the announcement of both programs "resulted in an immediate and sharp decline in interest rates."
Some Success
The U.K. plan has retained some success in cutting borrowing costs. Gilt yields are still about 30 basis points lower than the day before the Bank of England's announcement on bond purchases. The central bank has bought 25 billion pounds of gilts so far.
The economy is still shrinking, even though some reports have indicated its downward spiral has slowed. The National Institute of Economic and Social Research estimated yesterday that gross domestic product fell 1.5 percent in the first three months of the year, close to the biggest drop since 1980. The central bank's latest forecasts show inflation may slow to 0.3 percent in two years.
That weak economic outlook should convince the central bank to be clearer on its intentions, said Lena Komileva, an economist at Tullett Prebon Plc in London.
"The important thing for policy is not to become complacent," Komileva said. "We're still in an environment of great uncertainty about the health of the international banking system, compounded by a high level of spare capacity in the global economy. We're not there yet."
