BOE Unanimous on QE Amid Divisions on Inflation Risks

Bank of England Voted 9-0 to Maintain Bond-Purchase Target
The Bank of England said that “very substantial risks” from the euro area were likely to remain for some time. Photographer: Simon Dawson/Bloomberg

Bank of England policy makers voted unanimously to maintain their bond-purchase target this month as officials differed on the need for more stimulus in light of growing inflation risks.

The nine-member Monetary Policy Committee led by Governor Mervyn King voted 9-0 to keep the target at 375 billion pounds ($610 billion), according to the minutes of the Sept. 5-6 meeting published in London today. All members also agreed to hold the benchmark interest rate at 0.5 percent.

“For most members this decision was relatively straightforward, although some of these members felt that additional stimulus was more likely than not to be needed in due course,” the central bank said. “Others saw the risks to inflation in the medium as being more balanced around” the 2 percent target.

Global central banks are continuing to loosen policy as the euro-area debt crisis continues, threatening global growth and financial stability. The Bank of Japan unexpectedly expanded its asset-purchase fund today, a week after the U.S. Federal Reserve voted to extend its quantitative-easing program. The European Central Bank has agreed to buy the bonds of governments that accept austerity conditions to tame the euro turmoil.

“More QE isn’t a done deal and the MPC is going to want to take stock of policy actions here and abroad,” said Alan Clarke, an economist Scotiabank Europe Plc in London. “Clearly the door’s still open. Even if the end of the world is avoided things are going to be subdued for a long while.”

‘Finely Balanced’

The minutes showed that the September decision was “more finely balanced” for one MPC member, who saw a “good case” for adding more bond purchases this month. That’s fewer than in August, when the minutes showed that “for some members the decision was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases.”

The Bank of England last expanded QE in July and is currently buying 50 billion pounds of gilts in a program due to run until November.

It said today that “very substantial risks” from the euro area were likely to remain for some time. These, if they crystallized, “could have a considerable impact on the stability of the global banking system,” it said.

BOJ Expansion

The Bank of Japan unexpectedly expanded its asset-purchase fund by 10 trillion yen ($126 billion) to 55 trillion yen, seeking to counter an increasing danger of contraction in the world’s third-largest economy. Governor Masaaki Shirakawa said the bank also will abandon minimum yields for 1.8 trillion yen in monthly government-bond purchases conducted separately from the stimulus fund, opening the door to the potential for negative rates.

The MSCI Asia Pacific Index rose 0.6 percent today, while the Stoxx Europe 600 Index added 0.1 percent.

Japan’s weakening recovery faces an added threat from a territorial dispute with China, its biggest export market. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., halted production at some plants in China while Panasonic Corp. reported damage to a factory. Thousands have marched in anti-Japanese protests in dozens of cities.

Elsewhere in Asia, China said that foreign direct investment fell in August and that the spat with Japan will hurt trade relations between the two nations.

Europe Weakness

In Europe, construction output fell for a second month in July, suggesting the industry’s slump extended into the third quarter. Construction in the 17-nation region slipped 0.3 percent from June, when it dropped a revised 0.6 percent.

Swiss investor confidence fell in September as the economy’s weaker-than-forecast first-half performance damped the outlook. An index of investor and analyst expectations that aims to predict economic developments six months in advance dropped to minus 34.9 from minus 33.3 in August.

On the U.K. economy, the Bank of England said there may be further volatility in measured gross domestic product in the short term, though the level of demand “remained weak and the outlook was subdued and uncertain.”

It also said that recent industrial production data suggested some “modest underlying expansion,” and it forecast a modest recovery in underlying activity “beginning towards the end of the year and into next year.”

The central bank said that inflation, which eased to 2.5 percent last month, may cool at a slower pace in the “near term” than previously forecast. It noted that oil prices had risen and tensions in the Middle East could add to upward pressure.

“The rise in energy prices would mean that the squeeze on real household incomes would not ease further in the short term,” the central bank said.

FLS Outlook

Philip Shaw, an economist at Investec in London, said the MPC minutes show there is “still a bias toward more QE.” His “central case” is that the BOE will expand stimulus by a further 50 billion pounds in November.

“The minutes continued to refer to the substantial margin of spare capacity which would bear down on domestic inflation pressures for some time,” he said in an e-mailed note.

The Bank of England said the recovery in the U.K. would in part depend on the success of its Funding for Lending program, set up to boost credit to companies and households.

“The committee noted that banks would need time to review fully their lending plans and products, and it was likely to be some while before there would be drawdowns on a significant scale” from the FLS, it said. “Lending rates were thus a more immediate guide to the scheme’s impact and it was encouraging that there had been further cuts announced by some banks.”

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