Bank of England policy makers said the pound’s level may prove an obstacle to rebalancing the economy and David Miles cited the currency as he repeated his call for an expansion of stimulus.
The Monetary Policy Committee voted 8-1 to keep their bond-purchase plan unchanged at 375 billion pounds ($595 billion), according to minutes of the Jan. 10 decision published in London today. Members diverged on the risks to the economy, with some saying there was scope for wages to pick up while others noting that the economy could grow faster without generating inflation.
“Substantial headwinds to recovery remained, including the drag to activity from fiscal consolidation, a further squeeze in household real incomes, and the deterioration in U.K. competitiveness over the past couple of years,” the minutes said. “The sterling real exchange rate might be above the level compatible with the necessary rebalancing of the economy.”
The Bank of England halted bond purchases in November and is relying on its so-called Funding for Lending Scheme to aid the recovery. Bank of England Governor Mervyn King said yesterday that credit conditions have improved, and “should improve further as the impact of the FLS kicks in.”
The pound rose after today’s minutes report and data showing falling unemployment. The currency was up 0.2 percent today at $1.5871 as of 9:35 a.m. in London.
“We could provide even more monetary stimulus through further asset purchases,” King said in Belfast yesterday evening. “We will continue to assess the benefits and costs of further reductions in overnight interest rates. Be in no doubt that we are ready to provide more stimulus if it is needed.”
Miles said that there was enough slack in the economy to allow policy makers to stoke growth without generating inflation, and that there was a “strong” case to do so. He voted to increase bond purchases by 25 billion pounds, repeating his call from last month.
“An easing of monetary policy, in part by discouraging any further appreciation of sterling, could help the rebalancing and avoid potentially lasting destruction of productive capacity and increases in unemployment,” the minutes showed him as saying.
Jobless claims unexpectedly fell in December and a quarterly measure of unemployment also dropped, according to a separate report today. Benefit claims dropped by 12,100 to 1.56 million, the lowest since June 2011. The median forecast of 28 economists in a Bloomberg News Survey was for a gain of 500.
Unemployment measured by International Labour Organization methods fell to 7.7 percent in the three months through November, the lowest since the quarter through April 2011.
All nine policy makers voted to keep the benchmark interest rate unchanged at 0.5 percent, the minutes showed.
Developments during the month were “modestly positive,” and global financial market conditions had improved, policy makers said.
Along with developments in the U.S. and global growth prospects, “tensions associated with the imbalances within the euro area appear to have eased further,” the minutes said. “These developments had contributed to better financial market sentiment and generally higher asset prices.”
While developments “had not substantially altered the balance of risks associated with maintaining and increasing the size of the monetary stimulus, they had strengthened the belief of some of these members that no further asset purchases were required at the current juncture,” the minutes said.
Some policy makers said that factors driving inflation, currently at 2.7 percent, were likely to persist. The Bank of England targets 2 percent inflation.
“There was a risk that the prospect of continued above-target inflation could result in an erosion of credibility in the monetary policy framework which could affect wage and price-setting behavior,” the minutes said.