King backs UK’s asset buying plan

Bloomberg

The central bank may acquire securities such as corporate bonds and commercial paper to bolster lending to companies and consumers as banks rebuild balance sheets damaged by the global financial crisis, King said late Tuesday. The bank said yesterday officials opted not to cut its key rate by one percentage point this month on concern it might unsettle markets.

Quantitative easing hints
"There remains a risk that inflation will fall below 2 percent," the target rate even after the recent round of rate cuts, King said in a speech in Nottingham, England. "It is sensible for the Monetary Policy Committee to prepare for the possibility - and I stress that we are not there yet - that it may need to move beyond the conventional instrument" of the bank’s benchmark interest rate.

While the Bank of England has cut the rate by 3.5 percentage points to the current 1.5 percent since October, that won’t prevent an economic contraction in the first half of the year, he said.

King backed Prime Minister Gordon Brown’s plan to give the Bank of England unprecedented powers to buy securities, unveiled on Jan. 19 along with a 100-billion pound ($140 billion) bailout for banks. Those tools may later be expanded to fight deflation as the British economy faces a recession this year that may be the worst since the aftermath of World War II.

"This is a momentous speech that sets the policy agenda for the next decade," said Lena Komileva, an economist at Tullett Prebon in London. "More rate cuts are likely but before long, the Bank of England may reach the point of using quantitative easing to target inflation, in effect to prevent deflation."

Corporate bonds in pounds rose yesterday after King’s remarks. The Markit iBoxx Sterling Corporates index climbed 0.41 to 81.65 as of 10:25 a.m. in London, the first increase in five days. The index is made up of 757 bonds issued by companies including Barclays Bank, Vodafone and Unilever.

The pound yesterday fell to a record low against the yen and the weakest since 2001 versus the dollar on concern the U.K. slump will deepen and the central bank will ease monetary policy further. As of 11:02 a.m. in London, the currency was at 123.85 yen from 125.01 yen late in New York Tuesday. It declined to $1.3736 from $1.3928.

"Since the summer, the exchange rate has fallen by almost 20 percent, and oil prices have fallen by around two-thirds, both of which will boost demand," King said in the speech.

"A pronounced contraction in spending and output is under way," King said. "Total output in the fourth quarter is expected to have fallen sharply. In the first half of this year, the rate of contraction is likely to continue to be marked."