Finally the “brains” at the Bank of England wake up to the impotency of their QE program

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The Bank of England halted expansion of its bond-buying program todays after some policy makers questioned its effectiveness in supporting a recovery that still remains lacklustre.

Today’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. 

The nine-member Monetary Policy Committee led by Governor Mervyn King kept its target for asset purchases at 375 billion pounds ($598 billion) today, ending its third round of quantitative easing. The decision was forecast by 35 of 45 economists in a Bloomberg News survey. The remainder had forecast an increase of as much as 50 billion pounds.

Today’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. Increased inflationary pressures may also have prompted policy makers to hold fire even as surveys point to renewed weakness after the U.K. economy surged 1 percent in the third quarter.

“The outlook for the U.K. economy is still uncertain,” Roger Bootle, founder of Capital Economics Ltd. and a former U.K. Treasury adviser, said in an interview on Bloomberg Television’s “City Central” in London. “I suspect the fourth quarter is going to be weak, and if that’s the case, the discussion will come back to QE. I think we’re on course for more QE in the new year.” If this is the case, then Mervyn King needs his pulse taking – he is not just asleep at the wheel but driving comatose. The QE injections are doing NOTHING for the economy at the grass roots level, and as we are now seeing in the US with their recent QE3 program, even asset prices are failing to be lifted.

BOE Deputy Governors Paul Tucker and Charles Bean both suggested in recent speeches that asset purchases may no longer have the same impact on the economy as when first introduced in 2009. At the same time, Martin Weale has questioned whether loosening policy is right with inflation above the central bank’s 2 percent target.

Inflation was at 2.2 percent in September and King said last month that recent energy costs increases mean it will stay above the goal “well into next year.” Renewed signs of price pressures combined with the third-quarter gross domestic product data and comments from MPC members led banks including Citigroup Inc. and Barclays Plc to abandon forecasts of more QE today.

The widespread expectation of unchanged policy marks a sharp turnaround from forecasts just a few weeks ago that QE would be expanded,” said Chris Crowe and Blerina Uruci, economists at Barclays in London. “This is partly due to evidence of firmer inflationary pressures.”

The MPC had new growth and inflation forecasts at today’s meeting, which it will publish next week. Minutes of the meeting, showing how the committee members voted, will be released on Nov. 21.

In Frankfurt today, the European Central Bank’s Governing Council will leave its benchmark rate at a record low of 0.75 percent, according to 62 of 63 economists in a Bloomberg News survey. One predicts a cut to 0.5 percent. The decision is due at 1:45 p.m. local time and President Mario Draghi will hold a press conference 45 minutes later.

The ECB announced a bond-purchase plan in September to ease the debt crisis in the euro area, though as yet no country has applied for the program. The European Commission cut its 2013 growth forecast for the currency zone yesterday to 0.1 percent and said the region’s turmoil is one of main risks to the U.K.

The commission also said Britain’s near-term outlook remains “very weak” and lowered its 2013 growth forecast to 0.9 percent from 1.7 percent. U.K. indexes of manufacturing and servicesdeclined in October and a measure of retail sales plunged, reports in the past week showed.

At the same time, Prime Minister David Cameron’s government is cutting spending to narrow the budget deficit, adding to pressure on the economy. Marks & Spencer Group Plc, the U.K.’s biggest clothing retailer, said on Nov. 6 that recent trading “has been volatile” and it’s “cautious about the outlook for the rest of this year.”

“The U.K. outlook and data are rather mixed,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. “Activity is worsening, and euro-zone problems are still lingering.”

Even with QE halted, the Bank of England still has the FLS, which it set up with the U.K. Treasury and is aimed at boosting lending. The program began in August and as of last month, 30 financial institutions had signed up, including Lloyds Banking Group Plc and Barclays.

The MPC also has the option to restart QE if needed as it awaits euro-area developments and monitors how the U.S. deals with the fiscal cliff, the $607 billion of tax increases and spending cuts set to kick in automatically in January.

It is time to start thinking “nuclear” and look at a debt forgiveness program by major economies, similar to the periodic write offs that have occured with Third World countries. This strategy would not be anywhere near as potentially inflationary as QE maybe down the lone and would allow the re-setting of these embattled economies – something that is sorely needed in Southern Europe in particular.


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