Bank of England Governor Mervyn King’s drive for more stimulus gained momentum this month with some policy makers sharing his view that more bond purchases may be needed when the current round is completed.
“For some members, the risks of undershooting” the inflation target “meant that a further expansion of asset purchases was likely to be required,” the central bank said in the minutes of its Jan. 11-12 meeting published in London today. “But there was no compelling need to increase the scale of the program before completing those already announced.”
All nine policy makers voted unanimously for no change in the current 75 billion-pound ($117 billion) stimulus program, due to finish this month. King said yesterday that slower inflation gives policy makers room to increase bond purchases to guard against a “renewed severe downturn.” Data today showed the U.K. shrank 0.2 percent in the fourth quarter, more than economists forecast.
The Bank of England held the target for purchases at 275 billion pounds this month and kept its benchmark rate at a record-low 0.5 percent. The language in the minutes compared with view among some MPC members in November and December that more so-called quantitative easing “might well become warranted in due course.”
The pound pared its decline against the dollar after the minutes and the gross-domestic-product data. It traded at $1.5574 as of 9:58 a.m. in London, down 0.3 percent from yesterday. The yield on the two-year government bond was little changed at 0.44 percent.
Officials noted “uncertainties” related to the euro-area debt crisis, the pace of the U.K. recovery in the second half of 2012 and the outlook for inflation.
“There remained considerable risks to the downside from the global economy,” the Monetary Policy Committee said in the minutes. Still, “the committee agreed that there had been some positive developments over the month that had moderated some of the more serious near-term downside risks.”
The Bank of England noted the impact of the European Central Bank’s three-year loans in December, which it said had eased the “immediate risk of a more severe dislocation in the euro area arising from banking-sector difficulties.” Nevertheless, in the U.K. there was “little to alter the view that output was likely to be broadly flat” in the fourth quarter of 2011 and first quarter of 2012.
The MPC also said there had been a “sequence of slightly stronger data from the rest of the world, including the U.S.”
The Federal Open Market Committee concludes a two-day policy meeting today and will release a statement at 12:30 p.m. in Washington. The central bank will also publish forecasts from FOMC participants for the main interest rate, and Chairman Ben Bernanke plans to hold a press conference at 2:15 p.m.
King said in a speech yesterday that with inflation easing and wage growth “subdued,” there is “scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2 percent target.”
U.K. consumer-price growth slowed to 4.2 percent last month and the MPC forecasts that it will cool “sharply” in the coming months. The longer-term outlook for price growth is more uncertain, it said.
Some policy makers said the risks to inflation were “more finely balanced and it was less clear that inflation would fall below” the goal in the medium term. The central bank noted upside inflation risks from tensions in the Middle East, which may stoke commodity prices, as well as companies seeking to increase margins.