Bloomberg News

King Defeated in QE Vote as BOE Broadens Policy Debate: Economy

February 20, 2013

King, Fisher, Miles Defeated in QE Push as BOE Broadens Focus

Lights illuminate offices inside the Bank of England in London. Photographer: Chris Ratcliffe/Bloomberg

Bank of England Governor Mervyn King was defeated in a push for more stimulus this month as officials considered options including a rate cut and expanding the range of assets purchased as ways to help the economy.

King, Paul Fisher and David Miles wanted to increase the target for bond purchases by 25 billion pounds ($38 billion) to 400 billion pounds on Feb. 7, though they were outvoted by the remaining six members of the Monetary Policy Committee. The pound fell after the release of the minutes in London today.

Officials said they “stand ready” to increase quantitative easing to support the recovery, though they still questioned the effectiveness of current policy tools for easing credit strains in the economy. In a wide-ranging discussion on the need for “targeted” measures, they said some may be beyond the scope of the central bank and fall under the province of other government departments.

“Growth remained subdued and the economy continued to face a number of headwinds,” the MPC said. “A case could be made that, if further stimulus was required, policy interventions more targeted at particular frictions or market failures in the economy were likely to be more effective in current conditions than further asset purchases”

The pound tumbled to a 15-month low against the euro after the minutes and fell to the lowest since June versus the dollar. It depreciated 0.7 percent to 87.48 pence per euro as of 12:30 p.m. London time and fell 0.9 percent to $1.5292.

BOE Shift

This month’s meeting signals a shift in the MPC’s stance, as Miles had been alone in calling for more stimulus in January. King was last defeated in a vote in June, when he also pushed for more QE. A month later, the MPC expanded stimulus.

The February decision also marks the fourth time King was overruled since he became governor. He is due to retire in June and will be replaced by Bank of Canada Governor Mark Carney.

On the case for more QE, the minutes said the “degree of slack in the economy, and the likely positive response of supply capacity to increased demand, meant that higher output growth would not necessarily lead to any material additional inflationary pressure.” This could help rebalancing “and avoid potentially lasting destruction of productive capacity and increases in unemployment,” it said.

Still, the MPC said it “seemed possible that a further broad-based monetary stimulus would on its own be insufficient to transform the outlook for growth.”

“In that context, the committee also discussed other potential policy measures that the bank, together with other U.K. authorities, might deploy to address particular frictions or market failures,” it said. “These included measures to increase the flow of credit.”

Rate-Cut Discussion

Policy makers also considered lowering the benchmark interest rate from its record-low 0.5 percent at the meeting, purchasing assets other than gilts and changing the remuneration on bank reserves. These options had been considered in the past and the drawbacks noted previously remained, they said.

“The bank’s message couldn’t be any clearer - the MPC has shifted significantly in a more dovish, pro-active direction,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. This is “in part we surmise to facilitate the transition toward Mark Carney’s term.”

On the need to boost credit, the MPC said its Funding for Lending Scheme appeared to be operating as expected.

Still, it said that “consideration of measures to support the flow of credit more broadly, including from non-bank lenders, was also warranted.” It said “targeted” steps to boost demand and the supply capacity of the economy “might be entertained, but many of these fell to other U.K. authorities.”

Wage Growth

Separately today, data showed that unemployment claims fell 12,500 in January, more than twice as much as forecast. In the quarter through December, unemployment as measured by International Labour Organisation methods dropped 14,000 to 2.5 million. Employment jumped 154,000, the biggest gain since the middle of last year.

The labor-market report also showed that wage growth remains weak, with average weekly earnings rising 1.3 percent. That compares with inflation of 2.7 percent in January.

Noting the higher inflation outlook in its new forecasts last week, the MPC said that the pound’s recent decline has added to upward inflation pressure. It added that trying to slow price growth by removing stimulus “more quickly than currently anticipated by financial markets” could derail the recovery.

“Higher gilt yields represented a tightening; the more recent depreciation of sterling’s effective exchange rate had imparted an expansionary impetus, but it has also added materially to inflationary pressure in the near term,” the minutes said.

Japan Trade

In Japan, the finance ministry said the trade deficit swelled to a record 1.63 trillion yen ($17.4 billion) in January on energy imports and a weaker yen. Exports climbed 6.4 percent from a year earlier, the first rise in eight months, while imports increased 7.3 percent.

Also in Asia, Thailand held its benchmark interest rate at 2.75 percent. Malaysia’s economy grew at the fastest pace in 2 1/2 years last quarter, expanding 6.4 percent from a year earlier. That compares with the median estimate of a 5.5 percent advance in a Bloomberg News survey of 21 economists.

U.S., new residential construction probably cooled in January from a four-year high, economists forecast ahead of a report due today. Builders broke ground on houses at a 920,000 annual rate, down from December’s 954,000 pace, according to the median estimate of 85 economists surveyed by Bloomberg. Housing permits, a proxy for future construction, probably rose.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

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


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