UK bond buying target may rise amid debt crisis

London: The Bank of England (BoE) will raise its target for asset purchases this week as the debt crisis in Europe may have already pushed Britain's economy into a second recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King will increase its bond-purchase programme by £50 billion (Dh290 billion) to £325 billion, according to 35 of 51 economists in a Bloomberg News survey. Fifteen economists forecast a £75 billion increase, and one no change.

The economy may shrink 0.2 per cent in the first three months of 2012 after contracting in the fourth quarter, the National Institute for Economic and Social Research (Niesr) said on Friday. Malcolm Barr at JPMorgan Chase & Co. was among economists who cut their forecasts for an asset-purchase increase this week after an index of UK services growth rose to a 10-month high in January.

Expansionary phase

"Though big headwinds remain, the UK looks set for a proper expansionary phase," said Philip Rush, an economist at Nomura in London who forecasts a £50 billion increase. "With some of the pressure from big downside risks being removed, that alleviates some of the pressure for them to do £75 billion." Policy-makers will also hold their benchmark interest rate at 0.5 per cent, according to all 57 economists in a separate poll.

The bank will announce its decision at noon on Thursday in London and will vote in light of new economic forecasts to be published the following week.

Niesr cut its forecasts for UK growth Friday and Simon Kirby, a senior research fellow at the London-based group, warned of "downside" risks without "decisive action" in the euro area. Niesr forecasts the economy will shrink 0.1 per cent this year and grow 2.3 per cent in 2013, compared with previous projections in October for growth of 0.8 per cent and 2.6 per cent respectively.

A Greek rescue plan may be wrapped up in coming days, say creditors and European officials. Still, German Finance Minister Wolfgang Schaeuble said that "we can't pay into a bottomless pit".

An index of UK services purchasing managers rose to a 10-month high of 56 in January from 54 the previous month as new orders increased and business confidence improved, Markit Economics and the Chartered Institute of Purchasing and Supply said on Friday. The groups' gauge of manufacturing also showed faster growth.

After the services report Deutsche Bank's George Buckley and Morgan Stanley's Jonathan Ashworth said the bank would raise its bond plan by £50 billion this week instead of the £75 billion previously forecast.

Central bank policymaker Adam Posen said on Thursday that while there was still a case for the bank to add stimulus, he was "slightly more optimistic" than a few months ago. He said "there's a case" for raising bond purchases by £75 billion.

"It is a close call, but we expect the MPC will do another £75 billion," Michael Saunders, an economist at Citigroup, in London, said.