Outgoing Bank of England Governor Sir Mervyn King tasted defeat in his last bid to spur on the UK economy but successor Mark Carney may yet win support for a return to the printing presses, it emerged today.
Sir Mervyn, who delivers his final Mansion House speech this evening, voted for an extra £25 billion in quantitative easing along with fellow doves Paul Fisher and David Miles but was blocked by the other six members amid signs “the recovery was becoming more established”, minutes of the latest monetary policy committee meeting showed.
But the MPC appeared spooked by the turbulence in global financial markets since the US Federal Reserve hinted it could slow the pace of its own QE operations at the end of May, triggering a sharp rise in US Treasury yields and bond markets worldwide. Fed chairman Ben Bernanke will give eagerly awaited guidance to markets tonight.
The minutes revealed the MPC is now effectively in three camps. Some of the six-strong majority believe the recent volatility “illustrated the likely effectiveness of asset purchases should they be needed in the future”. Assuming Carney supports more QE when he joins the MPC next month, the waverers could give the Canadian the majority he needs for further action. But other hard-liners believe the benefits of more QE “were likely to be small relative to their potential costs”, and are unlikely to back more money-printing.
Royal Bank of Scotland economist Ross Walker said: “This has to be seen in the context of the tapering debate in the US. If we were to see an aggressive sell-off in Treasury markets, all things being equal gilt yields are going to rise as well, and this is a clear signal that they don’t want to see that. The message is don’t sell off gilts too aggressively because we will respond.”
Capital Economics chief UK economist Vicky Redwood said: “Mr Carney might even persuade the others to resume QE if the economic data struggle to maintain their recent positive tone.”
The dovish trio believe the case for more stimulus is “compelling” despite inflation likely to stay close to 3 per cent for the rest of the year. Although the Bank predicts UK growth will accelerate to 0.5 per cent in the current quarter, the minutes added that the “risks from the euro area remained substantial”.