Bank of England policy makers Adam Posen and David Miles were defeated in their bid to raise stimulus by 75 billion pounds ($118 billion) as the majority argued such a move might provoke alarm on the economy.
Seven of the nine-member Monetary Policy Committee, including Governor Mervyn King, voted to raise the asset-purchase target by 50 billion pounds to 325 billion pounds, according to minutes of the Feb. 8-9 meeting published today in London. They argued a larger increase “risked sending a signal that the committee thought the economic situation was weaker than it was.”
“Recent data on the domestic and international economies had on balance been more positive than might have been anticipated towards the end of 2011, pointing to the possibility that growth might be stronger than expected in the near term,” the majority argued, according to the minutes.
The pound fell against the dollar after the report and was trading at $1.5717 at 10:31 a.m. in London, down 0.4 percent on the day. Gilts advanced, pushing the yield on the 10-year bond down 5 basis points to 2.17 percent.
Posen and Miles called for 75 billion pounds of additional quantitative easing because of “the considerable margin of spare capacity remaining in the economy and the extent of deleveraging still likely to be required,” the minutes showed. They saw a risk of a “prolonged period of depressed demand causing inflation to fall materially below” the central bank’s 2 percent target.
“This leaves the door open for more QE,” said Victoria Cadman, an economist at Investec Securities in London. “We’re looking for another 50 billion pounds in May, and after that we don’t see any more as the economy picks up in the second half.”
The Bank of England expanded its asset-purchase program this month after the economy shrank in the fourth quarter amid a squeeze on consumers and Europe’s debt turmoil. The MPC said today that while growth will be “volatile” in the near term, it expects the pace of expansion to “strengthen gradually” from later this year. The panel was unanimous on keeping the benchmark interest rate at a record-low 0.5 percent.
The minutes also reveal that for some policy makers, the probability of inflation exceeding the target was “slightly higher than shown in the projection” in the central bank’s Inflation Report last week. Those members said a “case could be made for maintaining the stance of policy at this meeting.”
In the Feb. 15 report, the central bank forecast that inflation, which fell from a peak of 5.2 percent in September to 3.6 percent in January, will slow to its goal by the end of this year and reach 1.8 percent in two years.
In the minutes, the central bank said inflation is likely to continued to ease in the coming months, though the “speed and extent of the fall remained uncertain.”
The MPC saw upside risks to inflation from potential disruptions of oil supplies from tensions in the Middle East and companies raising prices to recover margins. It noted downside risks from demand growth being too weak to absorb the spare capacity in the economy “sufficiently.”
Data to be published Feb. 24 will probably confirm the economy shrank 0.2 percent in the fourth quarter, according to the median estimate of 36 economists in a Bloomberg News survey. Still, recent surveys indicate the economy may strengthen in the current quarter. U.K. manufacturing returned to growth in January, while expansion in the services sector accelerated.