By Craig Stirling
Jan. 28 (Bloomberg) -- The Bank of England may need to buy assets and print money within the next six months as the U.K. Treasury works to rescue the economy from recession, according to Barclays Plc economist Simon Hayes.
The forecast, from one of the banks that deals directly with the Debt Management Office on U.K. government bonds, also suggests Chancellor of the Exchequer Alistair Darling may add to the 20 billion-pound ($29 billion) stimulus program of tax cuts and spending increases announced in December.
Darling and Bank of England Governor Mervyn King may detail as soon as today a framework for policy makers to buy 50 billion pounds of assets, which the Treasury authorized on Jan. 19. So far, the chancellor has said the program won’t involve an increase in the money supply, which would boost inflation and growth.
“Outright deflation remains a key risk,” Hayes, Barclays’s chief U.K. economist and a former central bank official, wrote in a note today. “The better prepared the authorities are for dealing with deflation, the less worried the rest of us need be that a deflationary spiral might take hold.”
The measures set to be announced by Feb. 2 are a prototype of a so-called quantitative easing policy that the bank will use to influence the economy as interest rates approach zero.
The Bank of England has cut its benchmark lending rate to 1.5 percent, the lowest ever, as the economy tipped into recession. Policy makers may reduce the rate further to 1 percent when they finish their next meeting on Feb. 5, according to the median forecast of economists surveyed by Bloomberg News.
“Additional support, through a policy of quantitative easing and/or involving another substantial fiscal boost would appear necessary,” Hayes wrote. “We therefore expect a quantitative easing policy to be adopted in the second half, and are increasingly inclined to believe that the government will announce another significant fiscal injection.”
Prime Minister Gordon Brown’s government cut sales tax in December to 15 percent from 17.5 percent as part of a stimulus package for the economy announced in November. The central bank has lowered the key interest rate to 1.5 percent, the lowest since its foundation in 1694.
The Treasury said last week that the central bank can make asset purchases and the government will indemnify the bank against any losses, starting on Feb. 2. King said on Jan. 20 that policy makers may start buying assets such as corporate bonds and commercial paper in the next weeks.
The “asset purchase facility, although not a monetary policy tool in itself, provides the bank with the opportunity to investigate the practical issues surrounding the purchase of private sector assets,” Hayes said. “This experience should be desirable if and when such purchases become desirable.”
Credit losses for the major U.K. banks from the financial crisis may total as much as 240 billion pounds in the five years through 2012, economist Simon Ward at New Star Asset Management said in a report today. While that’s larger than the Bank of England’s 130 billion-pound estimate in October, it doesn’t mean that banks will need more government support, he said.