The Bank of England voted 8-1 to stop expanding its bond-purchase program this month as the majority said uncertainty among consumers and companies may be affecting the impact of quantitative easing on the economy.
David Miles dissented from the majority on the Monetary Policy Committee, calling for a 25 billion-pound ($40 billion) increase in the target to 400 billion pounds. The MPC voted unanimously to keep its benchmark interest rate at a record-low 0.5 percent and said it was “unlikely to wish to reduce” it in the “foreseeable future.”
“There was a question over the magnitude of the impact of lower yields and higher asset prices on the broader economy at the current juncture,” the central bank said in the minutes of the MPC’s Nov. 7-8 meeting, published today in London. “It was possible that elevated uncertainty and a desire to reduce leverage meant that real activity was less responsive to lower borrowing costs than normal.”
The MPC’s decision was also influenced by the U.K. Treasury’s announcement that it will take coupon income from the BOE’s gilt holdings in a move that would equate to a “small easing in monetary conditions.” While the MPC said it was “confident” the move wouldn’t impact its ability to set policy, it will take account of the arrangement in its decisions.
The pound pared a decline against the dollar after the report was released and was trading at $1.5930 as of 9:32 a.m. in London.
Inflationary concerns remained an issue for some MPC members, according to the minutes. After accelerating to 2.7 percent in October, the MPC said increases in energy costs and university tuition fees meant the chance of inflation slowing to below the 2 percent goal “were likely to be less.”
“And even if such price increases did not persist, the prospect of continued above target inflation in the near term increased the chance that any pickup in productivity would result in higher wage demands,” the Bank of England said. “This had added to the other potential costs of injecting further monetary stimulus at the current time.”
On interest rates, the MPC said it reexamined the potential effectiveness of a reduction. While it noted it could be beneficial for some existing borrowers, there were concerns it “might prove counter productive for aggregate demand as a whole” and lower profitability for some lenders. The rate has been at its current level since March 2009.
In the minutes, the MPC noted that a case could be made for a further easing in monetary conditions, including “discouraging any further appreciation of sterling.” For Miles, the case for more QE was “strong” due to the degree of slack in the economy, according to the minutes.
Pressure on the economy remains from the government’s fiscal squeeze and the ongoing crisis in the euro area. Finance ministers in the currency zone failed earlier today to agree on a debt-reduction package for Greece after battling with the International Monetary Fund over how to nurse the recession- wracked country back to fiscal health.
A separate U.K. report today showed Britain’s budget deficit unexpectedly widened in October as government spending surged and the economic slump hit tax revenue from company profits. The shortfall excluding government support for banks was 8.6 billion pounds compared with 5.9 billion pounds a year earlier. The median of 25 estimates in a Bloomberg News survey was for a deficit of 6 billion pounds.
The MPC said today that the U.K. economy may shrink in the current quarter and that underlying output growth “would remain sluggish in the near term.” At a press conference last week, Governor Mervyn King left open the option for more stimulus if needed.
“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” King said on Nov. 14. “There are limits to the ability of domestic policy to stimulate private-sector demand as the economy adjusts to a new equilibrium. But the committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”
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