Bank of England policy makers voted 8-1 to leave their bond-purchase program on hold this month as immediate risks from the euro area crisis receded and near-term inflation risks persisted.
David Miles dissented and voted to increase the target for purchases by 25 billion pounds ($41 billion) to 400 billion pounds, according to the minutes of the Monetary Policy Committee’s Dec. 5-6 meeting, published in London today. All nine members, including Governor Mervyn King, voted to keep the benchmark interest rate at 0.5 percent, a record low.
“The immediate risks emanating from the euro area seemed less pressing than they had in the summer, and financial-market sentiment had improved,” the MPC said. “Most members agreed that developments on the month had done little to alter the balance of arguments between maintaining and increasing” stimulus, and the current level of quantitative easing “seemed appropriate for the present.”
The Bank of England halted bond purchases in November and is relying on its so-called Funding for Lending Scheme to boost credit and aid the recovery. The MPC said early signs of the FLS were “encouraging.” Still, it said the economy may shrink this quarter and surveys pointed to “broadly flat underlying output” in the near term.
The pound remained higher against the dollar after the minutes were released. It was trading at $1.6288 as of 9:33 a.m. in London, up 0.2 percent on the day.
The MPC said preliminary analysis of the fiscal measures announced by Chancellor of the Exchequer George Osborne in his economic statement on Dec. 5 “suggested that their impact on the outlook for growth over the committee’s forecast horizon was likely to be small.”
The MPC also commented on the chancellor’s arrangement with the BOE to transfer gilt coupon income from the Asset Purchase Facility to the government. It said the government’s decision to reduce treasury bill issuance this fiscal year “implied slightly less of an easing in monetary conditions in the very short term” than had it chosen to cut gilt issuance.
The MPC also said that an “early understanding of the government’s gilt issuance plans for the 2013-2014 financial year would be helpful for its monetary policy decisions.”
On inflation, the MPC said it is likely to remain above the 2 percent target for the “next year or so,” though should slow to the goal in the medium term. It noted “substantial risks” to that outlook, including from “continuing adverse weather” that could disrupt harvests and push up food prices.
Data yesterday showed consumer-price growth remained at 2.7 percent in November. Upward pressure on inflation came mostly from food and utilities. Bank of England Chief Economist Spencer Dale raised concerns last week that inflation may show “stickiness.”
Even with that price outlook, Miles saw the case for more stimulus as “strong.” In his view, the outlook for growth “seemed a little weaker” and the level of spare capacity meant more stimulus could “achieve higher output growth without causing any material inflationary pressure.”
In the minutes, the MPC noted that the “drag from fiscal consolidation and rebalancing in the periphery was likely to continue into the medium term.” Recent data pointed to a “continuing contraction in the euro area, but a stabilization in global growth.”
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