King’s Defeat as Governor Heralds BOE Showdown He Tends to Win

Bank of England Governor Mervyn King
Mervyn King, governor of the Bank of England. Photographer: Simon Dawson/Bloomberg

Bank of England Governor Mervyn King is pulling policy makers closer to more stimulus as the central bank ramps up its response to the euro-area debt crisis.

King may succeed in his drive for more bond purchases in July after he was defeated in a 5-4 vote this month against more quantitative easing, according to HSBC Holdings Plc, Societe Generale SA and Royal Bank of Scotland Group Plc. On the last two occasions he was in the minority, it took at most three months for a majority of officials to follow his cue.

“It’s pretty clear he’s going to persuade the majority to switch to him,” said Brian Hilliard, chief U.K. economist at Societe Generale in London and a former Bank of England official. “The very fact that he’s in that position I think is an indicator that he expects the view to move soon.”

Europe’s turmoil is pushing central banks to add to stimulus, with the U.S. Federal Reserve last night saying it will expand its program to lower long-term borrowing costs to help the world’s largest economy. With Britain struggling to shake off a recession, King had signaled a shift in his stance last week, saying the case for more stimulus was “growing.”

King, along with policy makers Adam Posen and David Miles, voted to increase QE by 50 billion pounds ($78.5 billion) to 375 billion pounds, while Markets Director Paul Fisher favored a 25 billion-pound increase, according to the minutes of the Monetary Policy Committee’s June 6-7 meeting.

While the majority voted to leave the target unchanged, most “judged that some further economic stimulus was either warranted immediately or would probably become warranted,” the central bank said.

‘Clear Hint’

“The vote itself was a clear hint, but Mervyn sitting among those four certainly suggests that a July move seems pretty likely,” said Victoria Clarke, an economist at Investec Securities in London. It’s “almost four and a half” on the side of more stimulus, she said.

While King, who steps down in June next year, has lost a vote on 16 occasions in 182 meetings since the central bank was given rate-setting independence in 1997, he has only been in the minority four times since becoming governor in 2003.

The last time King was overruled was August 2009, when the central bank increased its bond-purchase target by 50 billion pounds to 175 billion pounds and King dissented in favor of a 75 billion-pound expansion. Three months later, the MPC increased the target by a further 25 billion pounds.

In July 2007, policy makers raised the key interest rate by 0.25 percentage points after King voted in the minority for such a move the previous month. When the governor opposed a decision to cut the rate by 0.25 percentage points in August 2005, the next change of policy by officials was to raise its main rate by the same amount a year later.

Euro Crisis

The euro-area crisis dominated talks at the Group of 20 summit in Mexico this week, where world leaders told the region to pull together to find a solution. King said last week that Europe’s turmoil has cast a “long shadow.”

In the U.S., the Fed said late yesterday it will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year in a bid to reduce unemployment and protect the economy’s expansion.

Minutes of the Bank of Japan’s May meeting showed policy makers expressed concern that the economy could be “adversely affected” by the materialization of “substantial risk” from Europe. Australia’s central bank cut interest rates on June 5, saying that Europe’s “economic and financial prospects have again been clouded by weakening growth, heightened political uncertainty and concerns about fiscal sustainability.”

Liquidity Action

As the threats from the euro-area debt crisis intensify, the Bank of England started a new liquidity operation for banks yesterday and is working on a plan with the government to boost lending. Both measures were unveiled by King in a June 14 speech.

“Being governor, you don’t want to be caught out in the cold,” Investec’s Clarke said, referring to King’s vote for more stimulus this month. “It’s a case of him wanting to say ‘Look, I was in favor of taking more action earlier.’”

Policy maker Ben Broadbent said the case for the Bank of England to expand QE has increased since May, Reuters reported yesterday, citing an interview.

HSBC, RBS and SocGen all changed their forecasts for when the central bank will increase stimulus to next month after the publication of the minutes. HSBC had previously predicted the move would happen in September, RBS in August, while SocGen had forecast a move by November.

“It’s not as if King is putting himself out on a limb and he thinks there’s a significant risk for six months that he’ll be voting for it and no further people are going to agree,” SocGen’s Hilliard said. “That’s clearly not the case.”

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