By Brian Swint Oct. 8 (Bloomberg) -- The Bank of England plans to spend the remainder of its 175 billion-pound ($278 billion) bond- purchase program as officials seek to drive home the economy’s recovery. The Monetary Policy Committee, led by Governor Mervyn King, kept the target for its plan unchanged today, as predicted by all 42 economists in a Bloomberg News survey. The central bank also maintained the benchmark interest rate at a record low of 0.5 percent. Policy makers will use new forecasts next month to appraise the plan, which prompted a split on the committee in August when King favored spending even more. Former Deputy Governor John Gieve said in an Oct. 6 interview that officials may consider an expansion in November because they will be wary of a “false dawn” for the economy. “We’re heading to a recovery of sorts, but unemployment is still rising and bearing down on inflation,” said Alan Clarke, an economist at BNP Paribas SA in London. “There’s still a case for more purchases, and I think they will do more in November.” The pound rose against the dollar after the decision. The U.K. currency was at $1.6071 as of 12:48 p.m. in London, from $1.5969 yesterday. The European Central Bank today kept its benchmark interest rate at a record low of 1 percent, as predicted by all 53 economists in a Bloomberg News survey. The U.S. Federal Reserve held its target rate at close to zero on Sept. 23. Election Approach Prime Minister Gordon Brown is trying to revive Britain’s economy in time for an election which he must call by June 2010. His ruling Labour Party fell to third place for the first time since 1982 in an opinion poll finished on Sept. 27. There are signs that the economy is picking up in the U.K. and around the world. Australia’s central bank on Oct. 6 became the first Group of 20 nation to raise interest rates since the start of the global financial crisis. U.K. House prices rose 1.6 percent in September, a third consecutive gain, Halifax said on Oct. 6. Services industries expanded at the fastest pace in two years and consumer confidence rose the most since 1995, reports have shown. At their Sept. 10 decision, policy makers said rising asset prices could create a “virtuous upward spiral” for the economy. Chief Economist Spencer Dale said last month that he favored limiting the increase in so-called quantitative easing to 175 billion pounds because of the risk spending more might stoke asset prices too much. King’s Vote King had favored a bigger increase in the program to 200 billion pounds as the bank’s predictions showed inflation may not return to the 2 percent target in two years. He and policy maker David Miles, who had sided with King, opted for consensus on the nine-member panel at the September meeting, while saying a bigger increase could still be justified. The bank has so far bought more than 160 billion pounds of government and company bonds and has pledged to spend the remainder of its plan by November. Miles said Sept. 30 that the bond purchases are “having an impact that is relevant to economic conditions right across the country.” The yield on the 10-year U.K. government bond was 3.39 percent today, compared with 3.64 percent on March 4, the day before quantitative easing started. Weakness Persisting The economy has shown some signs of persisting weakness. Manufacturing unexpectedly dropped in August to the lowest level since 1992, the inflation rate has fallen to the lowest since January 2005 and unemployment is at its highest in 14 years. British Airways Plc, Europe’s third-biggest airline, said Oct. 6 that 1,000 flight attendants have agreed to voluntary job cuts. “The main risk, short term, is that everyone thinks the recovery is over, we tighten too quickly, and we see a sort of ‘W’ emerge,” Gieve said. “The manufacturing figures are a reminder that it’s too early to say it’s definitely over” and extending the asset-purchase plan next month “will be an option they’ll look at pretty closely,” he said. David Blanchflower, a former policy maker who left in May, said the bank should expand its bond plan and also cut the rate it remunerates commercial bank reserves. Blanchflower tended to favor lower rates than his colleagues, and in three years on the panel, he voted for a reduction 19 times, favored no change on 16 occasions and wanted an increase only once. ‘Big Meeting’ “They’ve got to do more,” Blanchflower told Bloomberg Television today. “November will be a big meeting, and I suspect they’re going to do some more. The discount rate, remuneration on reserves may well be something that they can cut. Certainly, there’s thinking about more quantitative easing, and I suspect there’s still a thought about the possibility that 0.5 percent rate could come down further.” Bank lending is also still constrained as institutions repair balance sheets damaged in the financial crisis. Lloyds Banking Group Plc said today that it will keep its options open after the Financial Times said the lender is preparing to raise 15 billion pounds in a share sale. Britons cut consumer debt for a second month in August, repaying a net 309 million pounds, the most since April 1993. The average interest rate on mortgages fixed for two years was 4.42 percent in August, compared with 3.98 percent in March when the bank started quantitative easing. Minutes of today’s deliberations will be released on Oct. 21. The next decision is due on Nov. 5 and the bank will publish its new quarterly forecasts a week later. “This meeting is a holding position until we get to November,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “If I were on the committee, I’d increase quantitative easing, but it’s a difficult decision.”

Source