Bank split over the merits of another dose of monetary stimulus

Minutes of MPC meeting show two members voting against more QE

Click to follow
The Independent Online

The Bank of England was divided over whether to pump more monetary stimulus into the ailing British economy earlier this month.

The minutes of this month's meeting of the nine-person Monetary Policy Committee (MPC), released yesterday, showed the rate-setting body voted by seven to two in favour of buying a further £50bn in sovereign bonds to support demand and help pull the British economy out of its double-dip recession.

The Bank's Governor, Sir Mervyn King, his two deputies, Paul Tucker and Charlie Bean, the Bank's head of markets, Paul Fisher, as well as external MPC members David Miles, Adam Posen and Martin Weale, all voted in favour of more stimulus.

But external member Ben Broadbent and the Bank's chief economist, Spencer Dale, voted to keep the asset-purchase programme on hold, arguing that the committee should wait to see the impact of other measures to boost the economy – the new "funding for lending scheme" (FLS) and the Bank's recent liquidity operations – before extending the £325bn asset-purchase scheme.

They also warned that the recent decline in inflation, which fell to 2.4 per cent in June, might not be sustained as it was mainly a consequence of falling global oil prices.

The division came as a surprise to financial markets because on the previous two occasions that the MPC has increased the size of its quantitative easing (QE) programme, in October 2011 and February 2012, the votes in favour of more easing were unanimous.

Many economists had expected that the MPC division over stimulus would be about the size of the increase rather than whether to enact it all.

The split over QE left analysts divided over whether more asset purchases are likely from the MPC later this year when the present tranche is completed.

"The tone was very much one of waiting and seeing the impact of policy measures that are already in the pipeline" said Simon Wells of HSBC. "This could take time. So we think today's minutes add support to our view of no further gilt purchases this year".

However, Philip Shaw of Investec said: "With inflation falling we don't see much of a barrier to further QE being sanctioned later in the year if the economy remains weak."

The minutes also showed that the Bank is now more pessimistic about the UK's growth forecasts over 2012, with the committee noting that it now looks "possible that output will be roughly flat over 2012 as a whole".

In its May Inflation Report, the Bank of England forecast that the UK economy would grow by 0.6 per cent over the course of the year, before rising sharply to 2.1 per cent in 2013.

Despite the split on QE, the minutes showed that the MPC also discussed boosting the size of the asset-purchase facility by £75bn, rather than £50bn, and also cutting interest rates below their record low levels of 0.5 per cent, as recommended last month by the International Monetary Fund.

The minutes said members would revisit the latter question when they had seen the impact of the FLS. The Bank of England and the Treasury unveiled the programme to make cheap loans available to British banks and building societies that expand their lending to hard-pressed UK firms last week.

The minutes said that the Bank's research staff estimate the FLS will offset the tightening in credit market conditions that has occurred since May, when the eurozone crisis caused a tightening of interbank lending rates.

The UK economy shrank by 0.3 per cent in the second quarter of 2012, following a 0.4 per cent fall in the final quarter of 2011. Next week the Office for National Statistics will release its first estimate for growth in the second quarter of the year. Most City analysts are expecting it to produce another negative number, which will extend the UK's first double-dip recession since the 1970s.

Research by the Bank of England last year suggested that its first £200bn round of quantitative easing, which began in March 2009, successfully raised GDP by up to 1.5 per cent, while also raising inflation by 1.25 per cent.