BOE Voted Unanimously to Expand Stimulus to $380 Billion on Slow Economy
The nine-member Monetary Policy Committee led by Governor Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($434 billion) from 200 billion pounds on Oct. 6. All nine also voted to keep the key interest rate at a record low of 0.5 percent, according to the minutes of the decision published in London today.
Policy makers debated expanding QE by between 50 billion pounds and 100 billion pounds and said they expect the new round of stimulus to have a similar impact to asset purchases in 2009. They said the program could be “adjusted” if its impact differed from the committee’s expectations.
“Heightened awareness of the vulnerabilities associated with the indebtedness of several euro-area governments and banks had led to a further deterioration in demand prospects,” the minutes said. “While the worst risks had not crystallized, the threat of them doing so had resulted in severe strains in bank- funding markets.”
Bonds remained lower after the minutes were published, with the 10-year gilt yield up 7 basis points at 2.50 percent. The pound rose against the dollar and traded at $1.5785 as of 10:27 a.m. in London, up 0.5 percent from yesterday.
U.K. policy makers considered delaying an expansion of stimulus until November when they will have new quarterly forecasts. Still, they decided that “any advantage to delay was thought insufficient to outweigh the arguments for acting immediately.”
The European Central Bank has also responded to pressure on banks, announcing this month it will offer additional longer- term liquidity and restart covered-bond purchases. The Federal Reserve reacted to the economic slowdown last month by adopting so-called Operation Twist, replacing $400 billion of Treasuries in its portfolio with longer-term securities.
In a speech late yesterday, King said that “for the time being, a significant degree of policy stimulus is appropriate to support demand.” He also criticized global authorities for failing to deal with underlying imbalances and sovereign debt and said “time is running out.” European leaders are due to meet Oct. 23 in Brussels to discuss the region’s debt crisis.
The MPC minutes also said that while there was “considerable uncertainty” on the scale of stimulus needed, some members said the “substantial downside risks pointed to injecting a larger monetary stimulus than otherwise in order to place to U.K. economy in a stronger position were those risks to materialize.”
The minutes come a day after data showed inflation quickened to 5.2 percent in September, more than double the central bank’s 2 percent target. The bank said inflation is likely to fall back “sharply” in 2012.
Recent indicators suggest “that the underlying rate of growth had moderated and would be close to zero in the fourth quarter,” the minutes said. Ernst & Young LLP’s ITEM Club cut its 2011 U.K. growth forecast to 0.9 percent this month, and said the second bout of QE may not be enough.
The “increased downside risks” to growth make it “more likely that inflation would undershoot the target in the medium term, without further monetary stimulus,” the minutes said.
In their debate on the size of stimulus needed, the MPC agreed that differences in the impact of QE within the range under considerations were “likely to be outweighed by the degree of uncertainty about the outlook for inflation.”
The minutes “reveal a marked escalation of concern within the committee,” Howard Archer, an economist at IHS Global Insight said in an e-mailed note. The fact that officials “considered a 100 billion-pound helping reinforces belief that they will be prepared to dish out more stimulus if the economy fails to rally.”
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