Bank of England Voted 8-1 to Retain Stimulus in Third Defeat for Sentance
Aug. 18 (Bloomberg) -- Tom Vosa, head of market economics for Europe at the National Bank of Australia Ltd., talks about the outlook for Bank of England monetary policy. He speaks with Maryam Nemazee on Bloomberg Television's "Start Up." before the release of minutes from the Monetary Policy Committee's August meeting. (Source: Bloomberg)
Aug. 18 (Bloomberg) -- George Buckley, chief U.K. economist at Deutsche Bank AG, talks about the outlook for interest rates and the effect of the British government's spending cuts. He spoke with Maryam Nemazee on Bloomberg Television's "Countdown" before the release of minutes from the Bank of England's Monetary Policy Committee's August meeting. (Source: Bloomberg)
Bank of England policy makers considered arguments for expanding or withdrawing emergency stimulus this month before overruling Andrew Sentance’s third call for an interest-rate increase.
The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark rate at 0.5 percent and their bond-purchase plan at 200 billion pounds ($313 billion). Sentance pushed for an increase in the rate to 0.75 percent on concerns that inflation expectations may become dislodged.
“The committee considered arguments in favor of a further easing” and “there were also arguments in favor of a small increase in bank rate,” according to minutes of the Aug. 5 decision released by the Bank of England today in London. “The weight of evidence continued to suggest that the margin of spare capacity was likely to bear down on inflation.”
Annual consumer-price gains exceeded the 3 percent ceiling in July, requiring King yesterday to send a public letter of explanation to finance minister George Osborne on how he plans to control the cost of living. King argued that inflation has been driven higher by “temporary” factors and reiterated the central bank’s readiness to change policy in either direction.
The pound rose as much as 0.5 percent against the dollar after the release of the minutes and traded at $1.5598 as of 9:48 a.m. in London. The yield on the benchmark two-year government bond was down 1 basis points today at 0.681 percent.
‘Neutral Mode’
“Sterling is probably a bit firmer on the fact that there wasn’t a vote on further quantitative easing,” Philip Shaw, an economist at Investec Securities in London, said in a telephone interview. “The risks on further easing on monetary policy were probably a bit smaller before the publication of the minutes. But really the bank is in neutral mode.”
Policy makers voted after considering new quarterly economic projections that showed inflation will stay higher before slowing to about 1.5 percent in two years, below the 2 percent target, and growth will peak at a 3 percent annual pace instead of the 3.6 percent rate forecast in May.
“Inflation seemed likely to be temporarily higher than the committee had expected at the time of the May inflation report,” the minutes said. “Increases in the prices of some agricultural commodities in the days leading up to the meeting suggested that the increased volatility of CPI inflation in recent years might continue.”
Wheat Prices
Sterling has fallen by about a quarter on a trade-weighted basis since the start of 2007 while oil prices have more than doubled in the last 18 months. Wheat prices have surged 44 percent in the past year.
For Sentance, “economic conditions had improved over the past 12 months and the inflation outlook had shifted sufficiently to justify beginning to raise rates gradually,” the minutes said. Second quarter data “suggested the recovery was gathering momentum and there was evidence that firms had found it easier to pass through price increases.”
The economy expanded 1.1 percent in the second quarter, the most in four years.
“Growth had been surprisingly robust,” the minutes said. “That had been encouraging. Nonetheless, the growth during the quarter was coming from a low base -- and it would need many quarters of such growth to absorb spare capacity fully.”
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
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