Strength of UK recovery allows BoE to not follow Fed

LONDON: The Bank of England kept its emergency stimulus programme unchanged as the strength of the UK recovery persuaded officials not to join the Federal Reserve in buying more government bonds.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, held its bond-purchase plan at 200 billion pound ($324 billion), as forecast by 38 of 40 economists in a Bloomberg News survey. The others predicted an increase, and economists in another poll anticipate more stimulus in 2011. The bank also kept its interest rate at a record low of 0.5%.

Momentum in services and manufacturing after the economy’s strongest two consecutive quarters of growth in a decade and a bout of inflation have halted policy makers after a shift toward adding stimulus. The UK faces a budget squeeze that will inflict half a million job cuts at a time when US growth concerns prompted the Fed on Wednesday to pledge $600 billion in aid for the economy.

“The UK is in a completely different space than the US, with inflation relatively high and growth surprising on the upside,” said David Owen, chief European economist at Jefferies International in London. “Quantitative easing is a story for 2011, as the fiscal squeeze bites. There’s a strong case for saying that’s it,” for bond purchases.

The pound rose more than 1% on Thursday and traded at $1.6266 as of 12:50 pm in London. The yield on the benchmark two-year UK government bond was up 11 basis points at 0.668%.

Stocks climbed on Thursday, pushing the MSCI World Index to a more than two-year high after the Fed announcement. Combined with about $300 billion in reinvestment of the Fed’s maturing mortgage bonds, total purchases could run as high as $900 billion, or about $110 billion a month, the Fed said.

The Bank of England decision was the second in a 33-hour global central bank marathon. The European Central Bank kept its key rate at 1% on Thursday in Frankfurt, as predicted by all 55 economists in a Bloomberg survey. The Bank of Japan has brought forward its next decision to Friday.