Bank of England Policy Makers See Greater Stimulus as Increasingly Likely
Bank of England officials said they may need to buy more bonds to bolster a faltering recovery after holding off adding stimulus this month in a decision that was “finely balanced.”
Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 8 decision said. “For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting.”
The nine-member MPC, led by Mervyn King, voted 8-1 to maintain the size of the bond plan at 200 billion pounds ($313 billion) and were unanimous in keeping the benchmark rate at a record low of 0.5 percent.
No-one joined Adam Posen, who kept up his vote for a 50 billion-pound increase in purchases. His solo run on expanding so-called quantitative easing comes as policy makers in the U.S. and elsewhere refocus their attention on faltering growth and threats from Europe’s debt crisis. The Federal Reserve may announce a third round of asset purchases today to stoke growth and reduce unemployment.
“There had been significant downside news on activity over the month, including in the U.S. and the core euro-area countries, which had pointed to a synchronized slowing in global growth,” the minutes said. Along with surveys in the U.K., growth in the second half of 2011 may be “materially weaker” than projected in the Inflation Report in August.
The central bank will publish new forecasts in November.
The pound extended its decline against the dollar after the release of the minutes, falling to an eight-month low of $1.5614. It traded at $1.5670 as of 10:48 a.m. in London, down 0.4 percent on the day. Government bonds rose after the report before slipping back, leaving the 10-year gilt yield up 3 basis points at 2.42 percent. It fell to a record-low 2.18 percent on Sept. 12.
Officials considered ways of loosening policy at this month’s meeting, including “changing the maturity of the portfolio of assets held” and “revisiting the earlier decision” not to cut their key interest rate below 0.5 percent. They also discussed whether to provide “explicit guidance” on the future path of the benchmark.
“At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required,” the minutes said.
“This is clearly a major swing in a dovish direction,” James Knightley, an economist at ING Group in London, said in an e-mailed note. “Should the Bank of England cut its growth and inflation forecasts, as pretty much everyone else has, then a November increase in asset purchases will look likely.”
The Bank of England said in its quarterly bulletin on Sept. 19 that the bond plan has so far had “economically significant” effects. The asset purchases that began in March 2009 and finished at the start of 2010 may have raised gross domestic product by 1.5 percent to 2 percent and equaled a cut in the key interest rate of 150 to 300 basis points, it said.
Chief Economist Spencer Dale said in the report there was “considerable uncertainty” around the effects of the asset purchases. He will speak at the South Tyneside Manufacturing Forum in South Shields, England at 12:35 p.m. today.
In the U.S., the Federal Reserve policy makers will decide to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, according to 71 percent of 42 economists surveyed by Bloomberg News. “Operation Twist,” named for its goal to bend the yield curve, will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of economists said. The Fed will issue a statement at 2:15 p.m. New York time.
In a separate report, the Bank of England said spending growth on goods and services had “weakened further,” employment intentions pointed to “only modest” job creation over the next year and manufacturing growth had slowed. Still, inflation remains “elevated” at more than twice the bank’s 2 percent goal.
“Justifying an explicit change in policy in favor of easing when inflation and expectations for it are so high is an extremely difficult communication challenge,” said Philip Rush, an economist at Nomura International Plc in London. “So the MPC has collectively started to prime the public and its policy cannons for the launch of QE2.”
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