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Posen Switches Vote as BOE Concerned on Inflation Risks

BOE Monetary Policy Committee Member Adam Posen
Bank of England Monetary Policy Committee Member Adam Posen. Photographer: Michele Tantussi/Bloomberg

Adam Posen ended his push for further Bank of England stimulus this month and David Miles described his view on the need for more as “finely balanced” as officials said inflation may turn out faster than forecast.

The pound rose after minutes of the central bank’s April 4-5 meeting showed that Posen joined the majority of the nine-member Monetary Policy Committee in seeking no change to the 325 billion-pound ($517 billion) asset-purchase target. U.K. jobless claims rose less than economists forecast and the official unemployment rate fell, a separate report showed.

While Bank of England officials noted that the U.K. may face a recession in the first half of this year, they said inflation may turn out faster than forecast. They endorsed a final month of bond purchases to aid growth while setting the stage for a possible pause in May, when they will consider new quarterly forecasts and debate whether to halt the so-called quantitative-easing program.

“The probability of QE in May -- which already looked relatively low -- has diminished significantly,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “It is too soon to rule out further QE in the second half of 2012, but the probability of this is diminishing in response to short-term inflation ‘stickiness’ and firmer underlying activity data.”

While the International Monetary Fund said yesterday that policy makers can still loosen policy further to aid economic growth, data showed inflation unexpectedly accelerated for the first time in six months. Consumer prices rose an annual 3.5 percent in March, compared with 3.4 percent in February.

Inflation Threat

“There was a greater chance than before that above-target inflation would persist into the medium term,” officials said in the minutes released today in London.

Bank of England Deputy Governor Paul Tucker, who sided with the majority at this month’s meeting, said today that policy makers will keep inflation expectations anchored to the central bank’s 2 percent goal as the pace of price gains slows less than expected this year.

“Inflation might remain above 3 percent throughout the second quarter of this year, and possibly into the second half of the year,” Tucker said in a speech in Liverpool, northwest England. The rate of consumer-price gains remains “uncomfortably above target,” he said.

Miles, who along with Posen was outvoted for a 25 billion-pound increase in stimulus in March, and kept up his call this month, described his view on the need for more as “finely balanced” in the minutes.

BOE Forecast

“There was a risk that inflation would fall more slowly than assumed in the February inflation report projections, and the recent flow of data provided some support for this view,” the minutes said.

British jobless claims rose by 3,600 in March to 1.61 million, the Office for National Statistics said today in London. The median forecast of 29 economists in a Bloomberg News survey was for a gain of 6,000. Unemployment as measured by International Labour Organization methods dropped to 8.3 percent in the quarter through February from 8.4 percent.

The pound reached the strongest level against the euro in more than 19 months and gilts dropped with the yield on the U.K. two-year note climbing to a four-week high after today’s data. European shares fell for the first time in three days.

The pound appreciated 0.7 percent to 81.83 pence per euro at 12:13 p.m. London time. It reached 81.78, the strongest level since Aug. 31, 2010. Sterling climbed 0.3 percent to $1.5977. The two-year note yield advanced three basis points to 0.46 percent, after reaching 0.49 percent, the highest since March 21.

Stock Markets

The Stoxx Europe 600 Index fell 0.7 percent and Standard & Poor’s 500 Index futures declined less than 0.2 percent.

British economic growth “will be weak in early 2012, before recovering,” the Washington-based IMF said in its World Economic Outlook yesterday. “With inflation expected to fall below the 2 percent target amid weaker growth and commodity prices, the Bank of England can further ease its monetary policy stance.”

The statistics office will release its initial estimate of first-quarter GDP on April 25. That data will show whether the U.K. returned to recession after the economy shrank 0.3 percent in the final three months of 2011. Economic growth will be just 0.4 percent this year and will continue to stall until companies boost investment, Ernst & Young LLP’s ITEM Club said this week.

MPC Split

The bank’s forecasts in February showed inflation will slow below the 2 percent goal by the end of the year. The MPC split that month as seven policy makers voted to raise the bond plan by 50 billion pounds, while Posen and Miles wanted a 75 billion-pound increase. The two were outvoted last month seeking a 25 billion-pound increase.

Elsewhere in Europe, Sweden’s central bank today left its benchmark interest rate unchanged at 1.5 percent amid signs the largest Nordic economy will avoid a recession after policy makers across Europe stepped in to ease debt crisis concerns. The move was predicted by 14 of 18 economists surveyed by Bloomberg News.

Turkey’s central bank kept its interest-rate corridor unchanged, leaving the benchmark one-week repo rate, the floor of the corridor, at 5.75 percent, matching all 11 forecasts in a Bloomberg survey. The maximum rate on overnight loans was also unchanged at 11.5 percent, the Ankara-based bank said on its website today.

In Asia, data today showed China’s home prices fell in a record 37 of 70 cities tracked by the government in March as officials pledged to keep restrictions on property purchases that have sapped buyer demand. That underscores forecasts for China’s economic growth to slow further this quarter after the rate reached the lowest level in almost three years in the three months through March.

South Africa’s consumer price index increased 6 percent in March from a year earlier, slower than the 6.1 percent recorded in February and matching the median estimate of 18 economists.

In North America, the Bank of Canada will release its quarterly monetary policy report later today.

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