Posen, Miles Vote for More Bond Purchases as BOE Splits: Economy
Bank of England policy makers Adam Posen and David Miles maintained a push for more stimulus for the U.K. this month as the majority favored waiting to monitor the “substantial risks” to the medium-term inflation outlook.
Posen and Miles wanted to increase the target of the central bank’s bond-purchase program by 25 billion pounds ($40 billion) to 350 billion pounds, according to the minutes of the Monetary Policy Committee’s March 7-8 meeting published today in London. The seven remaining members voted to keep the current 325 billion-pound ceiling.
Divisions among MPC members have emerged about the outlook for consumer prices and whether the economy needs more stimulus as demand is curbed by Britain’s largest fiscal squeeze since World War II. Data showed the budget shortfall almost doubled in February, leaving Chancellor of the Exchequer George Osborne little room to meet his full-year goal as he prepares to announce his annual budget today.
The pound weakened against the dollar and the euro after the reports were published. It fell as much as 0.3 percent versus the U.S. currency and traded at $1.5876 as of 11:05 a.m. in London.
While the MPC today highlighted upside risks to inflation from rising oil prices and wage settlements in today’s minutes, it also said there were “significant risks to economic activity that might result in inflation falling materially below” its 2 percent target in the medium term.
“The recurrence of the dovish dissents was only partly balanced by the discussion of risks that might prevent inflation falling back as the MPC expects,” said Philip Rush, an economist at Nomura International Plc in London. Posen and Miles’s “activism” suggests that the “seeds of the ground- swell needed to deliver more easing have already been sown.”
Policy maker Martin Weale has said there is “risk that there may be more persistence to inflation,” while Chief Economist Spencer Dale said yesterday it may not slow as fast this year as the MPC has forecast due to rising energy prices.
With regard to threats to the downside, the Bank of England cited the euro-area debt crisis, “elevated” bank funding costs and the potential for higher borrowing costs and energy prices to undermine consumer confidence and spending.
The minutes also showed that that MPC voted 9-0 to hold its benchmark interest rate at a record low of 0.5 percent.
U.K. consumer-price gains eased to an annual 15-month low of 3.4 percent in February. The central bank sees inflation slowing from a peak of 5.2 percent in September to 1.9 percent by the end of this year and 1.8 percent by end-2013. The MPC said today that a “clear risk surrounded the outlook for crude oil prices.”
“If oil prices were to rise to a level significantly higher than the committee currently assumed, then that would tend to slow the global and domestic recovery, reduce supply growth and put upward pressure on domestic costs and prices,” it said. In addition, “there had been some signs of an upward drift in pay settlements.”
For Posen and Miles, a further stimulus was “warranted to reduce the risk that persistently weak growth would damage the future supply capacity of the economy.” They favored a 75 billion-pound increase in stimulus in February, when the central bank increased the target by 50 billion pounds.
This month, the majority of the MPC said “recent data had evolved in line with its expectations” and there had been “little change to the balance of risks.” On that basis, they saw “no reason” to change the current stimulus program.
Britain’s budget deficit unexpectedly widened last month as taxes fell and spending rose, the Office for National Statistics said. Net borrowing excluding support for banks was 15.2 billion pounds, the highest for any February on record, compared with 8.9 billion pounds a year earlier. The median of 17 forecasts in a Bloomberg News survey was 8 billion pounds.
Osborne will present his annual budget today amid calls to relax his deficit-reduction measures. He speaks to lawmakers in Parliament at 12:30 p.m. in London.
European (SXXP) stocks were little changed and U.S. equity index futures advanced before data later today that may show U.S. home sales near a two-year high. The Stoxx Europe 600 Index (SXXP) fell less than 0.1 percent to 268.95.
Purchases of existing U.S. homes climbed 0.9 percent in February to a 4.61 million annual rate, the fastest since May 2010, from a 4.57 million pace in January, economist estimates compiled by Bloomberg show. An advance would be the fourth in five months.
In Asia, departing adviser to China’s central bank, Xia Bin, urged more autonomy for the monetary authority as the country prepares to free up interest rates and increase the yuan’s role as an international currency. The People’s Bank of China “should be given more power in the areas of some short- term and specific monetary policy adjustment and operations,” Xia, 60, said in an interview with Bloomberg Television in Hong Kong yesterday, a week after his two-year term ended.
Elsewhere in Asia, Thailand’s central bank kept interest rates on hold today. In Japan, the Cabinet office said the world’s third-biggest economy was “still picking up slowly,” while Malaysia’s central bank said gross domestic product will expand at a slower pace this year than the government previously forecast.
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