Bank of England policy makers voted 8-1 to leave their bond-purchase program on hold this month as immediate dangers from the euro-area crisis receded and near-term inflation risks persisted.
David Miles dissented and voted to increase the target for purchases by 25 billion pounds ($41 billion) to 400 billion pounds, according to the minutes of the Monetary Policy Committee’s Dec. 5-6 meeting, published in London today. All nine members, including Governor Mervyn King, voted to keep the benchmark interest rate at 0.5 percent, a record low.
“The immediate risks emanating from the euro area seemed less pressing than they had in the summer, and financial-market sentiment had improved,” the MPC said. It added that inflation will probably remain above the central bank’s 2 percent target for the “next year or so.”
The Bank of England halted bond purchases in November and is relying on its so-called Funding for Lending Scheme to aid the recovery. While the MPC said early signs of the FLS were “encouraging,” it warned that the economy may shrink this quarter and that surveys pointed to “broadly flat underlying output” in the near term.
The MPC said preliminary analysis of the fiscal measures announced by Chancellor of the Exchequer George Osborne on Dec. 5 “suggested that their impact on the outlook for growth over the committee’s forecast horizon was likely to be small.”
The MPC also commented on the chancellor’s arrangement with the BOE to transfer gilt coupon income from the Asset Purchase Facility to the government. It said the government’s decision to reduce treasury-bill issuance this fiscal year rather than gilt issuance “implied slightly less of an easing in monetary conditions in the very short term.”
The MPC said that an “early understanding of the government’s gilt issuance plans for the 2013-2014 financial year would be helpful for its monetary-policy decisions.”
On inflation, the MPC said it should slow to its target in the medium term, though it noted “substantial risks” to that outlook, including from “continuing adverse weather” that could disrupt harvests and push up food prices. Data yesterday showed consumer-price growth remained at 2.7 percent in November. Upward pressure on inflation came mostly from food and utilities.
Not as Dovish
“These weren’t quite as dovish a set of minutes as some of the comments from MPC members in recent times might have implied,” said David Tinsley, an economist at BNP Paribas in London, who forecasts no change to QE next year. “There is clearly a risk the committee will come back to QE, but it will take a pronounced weakening in the survey data flow over the first quarter.”
The pound rose to $1.6307 today, the highest in almost three months, and was at $1.6295 as of 10:30 a.m. in London. It’s risen 2.4 percent against the dollar in the past month.
Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said the MPC’s “broadly neutral policy position” remains firmly in place. He expects no change to stimulus through 2013.
In the minutes, the BOE said most MPC members “agreed that developments on the month had done little to alter the balance of arguments between maintaining and increasing” stimulus. The current level of quantitative easing “seemed appropriate for the present,” it said.
For Miles, the case for more stimulus was “strong.” In his view, the outlook for growth “seemed a little weaker” and the level of spare capacity meant more stimulus could “achieve higher output growth without causing any material inflationary pressure.”
In the minutes, the MPC noted that the “drag from fiscal consolidation and rebalancing in the periphery was likely to continue into the medium term.” Recent data pointed to a “continuing contraction in the euro area, but a stabilization in global growth.”