Further monetary stimulus back on the menu
Monetary Policy Committee minutes indicate growing support for more quantitative easing
The prospect of further monetary stimulus from the Bank of England appeared more likely yesterday as the minutes of the latest meeting of the rate-setting Monetary Policy Committee revealed that two members voted in favour of buying more assets last month.
Adam Posen and David Miles argued that the level of asset purchases should be increased by £75bn. The pair pointed to the amount of slack in the British economy and the levels of debt repayment by households and firms as a justification for more stimulus to support economic demand.
Mr Posen has been a long-term advocate of asset purchases from the central bank, but the support of Mr Miles for more extensive easing was a genuine surprise to financial markets.
The rest of the Monetary Policy Committee voted for an extra £50bn in purchases, creating a 7-2 split on the nine-person rate-setting panel.
Financial markets had interpreted last week's quarterly Inflation Report from the Bank, which showed inflation returning close to the 2 per cent target over the two-year forecast period, as a signal that this latest round of quantitative easing – which will take the full programme of asset purchases up to £325bn – will be the last. But yesterday's minutes prompted some analysts to predict more rounds of asset purchases in the coming months as the two doves on the MPC gain ground.
"A further extension of QE is likely later in the year," said Simon Wells of HSBC. And some economists said that a weakening of the UK economy would be the trigger for more monetary stimulus from the Bank. "The committee's forecasts are still based on optimistic expectations for GDP growth. We doubt that these will be met, meaning that more QE will still be necessary to stop inflation undershooting its target," said Vicky Redwood of Capital Economics.
However, the published minutes also revealed that "some members" of the MPC – thought likely to be Spencer Dale and Martin Weale – saw a case for keeping the asset purchasing facility on hold this month, suggesting a growing divergence of views on the committee over monetary stimulus. Before today, every MPC vote on the scale of the asset purchase facility has been unanimous since the programme was restarted last October.
Financial markets jumped in response to the minutes. The value of sterling fell against the dollar to $1.57 and 10-year gilt yields instantly dropped 4 basis points as traders adjusted to the increased possibility of more asset purchases by the Bank.
"The MPC's greater than expected appetite for QE could be a factor which restrains any strength in sterling over the next couple of months," predicted Philip Shaw of Investec.
The Bank of England also published a report from its regional agents yesterday which showed tougher conditions for firms around the country, contradicting some of the more encouraging surveys of business activity since the turn of the year. The Bank agents' survey showed a softening of investment intentions and a moderation in the pace of exports. It also indicated that credit conditions for small firms have tightened in recent weeks as banks have made it more difficult for small businesses to borrow.
The Inflation Report last month said that events in the eurozone have the potential to throw the UK economy off course. And a series of PMI surveys yesterday gave markets a shock, showing economic activity across the continent contracting. The poor data raises the probability that the eurozone has entered a recession.
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