Bank of England policy maker Adam Posen’s 11-month push for more stimulus is now shaping the debate among officials as they consider whether the U.K. needs more quantitative easing to fight the danger of Europe’s crisis.
With no policy maker seeking an interest-rate increase after Spencer Dale and Martin Weale switched votes, the discussion on the Monetary Policy Committee has shifted toward Posen’s agenda. He has pushed since October to increase the bank’s 200 billion-pound ($261 billion) bond-purchase plan.
At stake is whether the U.K. can withstand an intensifying debt crisis in its biggest export market at a time when the domestic economy is struggling to grow and unemployment is rising. Spending cuts by Prime Minister David Cameron’s government to reduce Britain’s deficit have left the onus on the Bank of England to provide stimulus if the recovery falters.
“QE is potentially a lot closer than it would have appeared just a few weeks ago,” Ken Wattret, an economist at BNP Paribas SA in London, said in a telephone interview. We are in a “period of negative spillover effects from markets to the real economy and we are by no means at the end of that. If anything, that will probably intensify in the next few weeks.”
Minutes of the nine-member MPC’s Aug. 3-4 meeting published yesterday showed some officials “considered whether there was a case for increasing” the bond plan. Posen, 44, was the only one to vote to add to purchases, calling for a 50 billion-pound increase.
The decision was the first since May 2010 without a vote for higher interest rates. ABN Amro Bank NV pushed back its forecast for a rate increase to May 2012 from February after the minutes, while Barclays Capital also changed its view and now sees the bank on hold until August 2012.
The unanimous vote to hold the benchmark at a record-low 0.5 percent marks a shift from earlier this year, when accelerating inflation pushed three policy makers to favor higher borrowing costs. Andrew Sentance, whose term ended in May, had sought a half-point increase, while Weale and Dale wanted a quarter-point move.
“The hawks have thrown in the towel,” said Nida Ali, an economic adviser at Ernst & Young LLP’s Item Club. “More quantitative easing has gone from being a mere back-up option to being a genuine possibility in the near future.”
‘Holding My Nerve’
Posen raised the prospect of restarting the asset-purchase program in September 2010 and has voted for it at every meeting since October. Monetary policy “should continue to be aggressive about promoting recovery,” he said on Sept. 28. In March, he said he wouldn’t seek a second term at the central bank if he had “made the wrong call.”
“I am accountable for my performance,” he told the Guardian newspaper. “I’m holding my nerve because it is the right thing to do.”
With the U.K. recovery showing signs of faltering, his opinion may be gaining sway. Jobless-benefit claims rose 37,100 to 1.56 million in July, the biggest gain since May 2009, data yesterday showed. The FTSE 100 Index has fallen 7 percent this month amid a global stock selloff sparked by concern that Europe will fail to contain its debt crisis and that the global recovery is cooling.
“Recent developments in world stock markets and in the euro areaa are of particular concern,” Bank of England Governor Mervyn King said in a letter to Chancellor of the Exchequer George Osborne published Aug. 16. A week earlier, he said headwinds are “becoming stronger by the day.”
U.K. economic growth slowed to 0.2 percent in the second quarter and investors have pushed back bets on when the bank will raise rates until after July next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average show. The pound has weakened against 10 of 16 major peers tracked by Bloomberg in the past six months, while 10-year bond yields have fallen to a record low.
Other central banks have responded to threats to their economies. The European Central Bank began buying bonds of Italy and Spain this month to lower yields on the nations’ debt. The Swiss National Bank is boosting liquidity to the money market to weaken the franc and protect exports, while the Federal Reserve pledged to hold its main interest rate near zero at least until mid-2013, saying U.S. growth is “considerably slower” than anticipated.
In the U.K., inflation accelerated to 4.4 percent in July, more than double the bank’s goal. That may continue to divide the MPC and keep a majority from voting for more QE, according to Alan Clarke, chief U.K. economist at Scotia Capital in London.
“The only sticking point is whether they can justify pulling the trigger on QE when inflation is heading to 5 percent,” he said. “There’s nothing they can do about it. It’s not happening because the recovery is overheating. It will still be a hard sell.”
Clarke sees a 45 percent chance the bank will expand its bond program in the next year, with November being the earliest it may happen.
Weale said today that while he ended his call for higher interest rates this month as global growth showed signs of weakening, he doesn’t think it’s time for the central bank to expand its bond-purchase program.
‘Strike a Balance’
“I don’t think it is,” Weale said in an interview broadcast on BBC Radio Scotland, when asked if it was time for more quantitative easing. “When we form our view, we have to strike a balance between different forces on the economy. There were international headwinds affecting the growth rate, but we do also have to remember the inflation rate is very high.”
So far, the MPC members who have raised the prospect of more stimulus say the case is “not yet strong enough,” according to the minutes. Still, they added that further asset purchases might “become warranted were some of the downside risks to materialize.”
“It’s still a minority view, but that can change pretty quickly if it looks as if the economy is heading for another down leg,” Wattret said. “I’m quite nervous that the upcoming flow of data in the U.K. and the key trading areas like the euro area and the U.S. is going to get worse. So securing a majority in favor of more QE is not that difficult.”