Bloomberg News

King Defeated in BOE Stimulus Push as QE Momentum Grows

June 20, 2012

King Sought 50 Billion-Pound QE Extension in BOE Vote Defeat

Bank of England Governor Mervyn King, seen here, Adam Posen and David Miles dissented in favor of a 50 billion-pound expansion. Photographer: Simon Dawson/Bloomberg

Bank of England Governor Mervyn King was overruled for the first time since 2009 as he joined a push to expand stimulus that’s gaining momentum amid rising jobless claims and growing risks from Europe’s debt crisis.

The Monetary Policy Committee voted 5-4 to keep its bond- purchase target at 325 billion pounds ($511 billion) this month. That defeated votes by King, Adam Posen and David Miles for a 50 billion-pound expansion, and Paul Fisher’s bid for 25 billion pounds. A separate report showed jobless-benefit claims climbed climbed 8,100 in May from the previous month to 1.6 million, the Office for National Statistics said.

This month was the first time King voted in the minority since August 2009, showing the central bank is moving closer to adding stimulus after it halted expansion of its quantitative- easing program in May. The Federal Reserve will probably decide today to expand Operation Twist beyond $400 billion to spur growth, economists say, as Group of 20 leaders meeting in Mexico press Europe to step up measures to contain the region’s crisis.

“The risks to U.K. and global activity from financial distress and political tension within the euro area had intensified again,” Bank of England policy makers said in the minutes of their June 6-7 meeting. Most members “judged that some further economic stimulus was either warranted immediately or would probably become warranted to meet” the 2 percent inflation target.

BOE Forecast

Royal Bank of Scotland Group Plc brought forward its forecast for when the U.K. central bank will increase its asset- purchase program to July from August after the minutes. Officials will expand the plan by 50 billion pounds next month, “with further increases beyond that a clear possibility,” RBS economists including London-based Ross Walker and Richard Barwell said in a note to clients today.

The pound was little changed today after initially weakening after the minutes and unemployment report. It traded at $1.5735 as of 11:55 a.m. in London. The yield on the 10-year U.K. government bond slipped 1 basis point to 1.706 percent.

“The chances of more QE next month are looking quite high now,” said Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official. “Given that King’s in the minority, it increases the chance that some of the other five will follow as he’s the intellectual leader.”

King said in a speech last week the case for more stimulus in the U.K. is “growing,” as he warned that the euro-area debt crisis is casting a “long shadow over our own recovery.”

The Bank of England said in the minutes that most MPC members saw “merit in waiting” on any QE expansion to see the outcome of the June 17 elections in Greece and the European Council meeting at the end of the month.

“The case for further stimulus depended in part on how those events unfolded,” the minutes said.

Unemployment Increases

The gain in U.K. unemployment-benefit claims compares with the the median forecast of 20 economists in a Bloomberg News survey for a drop of 4,000. The jobless rate as measured by International Labour Organization methods held at 8.2 percent.

The figures suggest the labor-market recovery is running out of steam, increasing pressure on Prime Minister David Cameron. His budget cuts have been blamed by the opposition Labour Party for pushing the U.K. into its first double-dip recession since the 1970s.

At their meeting this month, the MPC voted unanimously to leave the main interest rate at a record-low 0.5 percent in June. It discussed cutting the rate before concluding that such a move “would not have any advantages over an expansion of the asset-purchase program.” Officials also discussed changing the remuneration structure on banks’ reserves at the central bank by paying the key interest rate on only some of the reserves.

Liquidity Auction

Some MPC members also “expressed a wish” for the central bank to consider additional policy tools. The Bank of England today held the first auction in a new liquidity program, allotting the full 5 billion pounds on offer. It didn’t provide any further details of the auction.

The activation of the Extended Collateral Term Repo operation, which was announced in December, marks a step-up by the Bank of England in its response to the debt crisis. Euro- area leaders at the G-20 summit pledged to take “all necessary policy measures” to defend the currency union as Spain grapples with a banking crisis.

Greek Talks

Haggling among Greek political leaders is continuing today as they bid to form a coalition that will seek relief from austerity measures tied to emergency loans. Democratic Left leader Fotis Kouvelis said today his party has provided support for the formation of a coalition with New Democracy and Pasok and an agreement may be reached in the next 24 hours.

Elsewhere in Europe, Swiss investor confidence fell to the lowest in five months in June, while consumer sentiment in the Netherlands dropped to the lowest level in nine years.

In the U.S., 58 percent of economists in a June 18 poll said the Fed will prolong its Operation Twist program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio. The current program ends this month. The U.S. central bank will announce its decision at around 12:30 p.m. in Washington.

In Asia, Japan reported its first trade deficit with the European Union since the Finance Ministry began tracking data in 1979 as the debt crisis limits a rebound in Japanese exports.

The Bank of Japan should be ready to “take appropriate actions without ruling out any options in advance” should the European crisis worsen, some board members said in May, according to minutes released today.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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