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BOE FOCUS-A speedier stimulus may mean a quicker exit

Published 11/23/2009, 12:35 PM
Updated 11/23/2009, 12:39 PM

* Divergence from other central banks unlikely to last

* BoE seen hiking faster than ECB or Fed over next 3 yrs

By Christina Fincher

LONDON, Nov 23 (Reuters) - The Bank of England has raced far ahead of its peers along the quantitative easing road, but it could overtake other central banks in the reverse direction when the time comes to tighten.

Although the BoE's rhetoric remains more dovish than that of the European Central Bank, investors are betting both banks will start to withdraw stimulus in the second half of next year, and the BoE will be more aggressive in raising rates thereafter.

Britain's central bank has traditionally been more activist and unpredictable than its euro zone counterpart.

However, as minutes to the BoE's November policy meeting highlighted, policy activism can go in both directions.

"One consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn," minutes taken from the meeting noted.

Peter Westaway, chief European economist at Nomura, said this line was significant and should be interpreted in a hawkish light.

"It suggests the quicker you get it done, the quicker you can start to reverse it," he said.

DOVISH OR ACTIVIST?

The Bank of England's decision to extend its money printing programme contrasts with the focus on exit strategies that has preoccupied other central bankers.

The 25 billion pound extension this month brings the BoE's total QE programme to 200 billion pounds. At more than 14 percent of Britain's gross domestic product, that is more than similar programmes from either the U.S. Federal Reserve or the Bank of Japan.

The ECB has made just a token QE effort, buying 60 billion euros of covered bonds. Instead it has focused on pushing money market rates lower by offering cheap one-year funds.

"The scale of the BoE's asset purchase programme has been truly extraordinary, but history shows it can change its spots quickly," said Barclays Capital economist Julian Callow.

"The BoE is more spontaneous and unpredictable than the ECB which places a higher premium on consistency," he added.

The Fed has alreadly indicated it will wind down its asset purchase scheme in the first quarter of next year while the ECB has hinted that December's offer of cheap one-year money is likely to be its last.

Despite the BoE's insistence that all options remain on the table, few expect it to amass any more gilts beyond February, when the current programme will be completed.

Despite stressing the headwinds to recovery and the uncertainties surrounding fiscal policy, the BoE is forecasting one of the strongest economic rebounds in Britain's history.

And with so much stimulus already in the system, including a weaker pound and a massive state-funded bank bailout, it is easy to envisage monetary policy being tightened more quickly in Britain than elsewhere.

Futures prices show investors expect UK interest rates to have topped 4 percent in three years' time, well above euro zone rates of around 3 percent and U.S. rates of around 2 percent.

"We're used to saying the BoE is more dovish than other central banks. Perhaps it would be more accurate to say it is simply more activist," said Philip Shaw, chief economist at Investec. (Additional reporting by Sakari Suoninen in Frankfurt; editing by Stephen Nisbet) ((uk.economics@reuters.com +44 207 542 7748; Reuters Messaging christina.fincher.reuters.com@reuters.net))

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