Bank of England Governor Mervyn King is trying to pull out all the stops to avoid handing over a failing economy to his successor Mark Carney.
As Carney’s arrival in four months fuels the debate about potential new measures to help the U.K., King is pressing for more bond purchases and leading a debate on what can be done to encourage lending, boost exports and bolster the recovery. He is even calling for the government to take more action, saying it needs to work with the central bank to spur economic growth.
“Everything they’re talking about now seems to be straight out of the Carney playbook,” said Rob Wood, who was a Bank of England economist until he moved to Berenberg Bank last year. “The vote for more quantitative easing could be a sort of signalling device. It’s a way of saying with the economy flat-lining, wage growth basically zero, we need to be seen to be doing something.”
King was in the minority on the Monetary Policy Committee on Feb. 7 when he voted to increase QE by 25 billion pounds ($38 billion). That same day, Carney told U.K. lawmakers he favored allowing the Bank of England greater flexibility in meeting its inflation target, having already sparked a debate on bolstering recoveries from recessions by saying that central banks aren’t “maxed out.”
The minutes of the MPC meeting, published yesterday, said that further asset purchases “could help the process of rebalancing the economy.”
King’s decision along with Paul Fisher to join David Miles in voting for more QE surprised economists. They had predicted that the minutes would show only one MPC member voted for QE.
The pound fell for a fourth day against the dollar today, slipping 0.2 percent to $1.5203 as of 8:55 a.m. in London. It dropped to $1.5132 earlier, the lowest since July 2010. Sterling was at 86.92 pence per euro.
The BOE has bought 375 billion pounds of gilts since March 2009 and completed the latest round of purchases in November.
Still, the MPC said yesterday it was “possible that a further broad-based monetary stimulus would on its own be insufficient to transform the outlook for growth.” With that concern in mind, policy makers discussed alternative potential measures that the BOE and “other U.K. authorities might deploy to address particular frictions or market failures that might hamper growth and the rebalancing.”
“If Carney comes in as dovish as one would expect, King’s move here has prepared the way,” said David Tinsley, an economist at BNP Paribas SA in London who formerly worked at the central bank. “It suggests that if they want to pursue radical easing it’s very easy from that voting position to do so.”
The new drive for measures shows the MPC is sticking to its position that it’s right to “look through” the protracted period of inflation above the BOE’s 2 percent target. That flexible application of its remit prompted King to say on Feb. 13 that the prospect of faster price growth should be considered “alongside the weakness of the real economy.”
Britain’s economy shrank 0.3 percent in the fourth quarter and King has forecast a “slow” recovery amid headwinds that include continued euro-area weakness and a squeeze on consumers.
In addition to doubts about the continued ability of QE to help the economy, there may also be concerns on the MPC about the Funding for Lending Scheme, introduced last year to boost credit. The BOE said last week it had a “relatively cautious stance” on the feed-through of the FLS amid signs its impact on corporate lending has been less pronounced than on the mortgage market.
The MPC said yesterday its Feb. 6-7 discussions included other “measures to increase the flow of credit.”
“In addition to improving the supply of bank credit, the committee thought that consideration of measures to support the flow of credit more broadly, including from non-bank lenders, was also warranted,” it said.
Policy makers also considered lowering the key interest rate from its record-low 0.5 percent, purchasing assets other than gilts and changing the remuneration on bank reserves.
“The discussion of not just QE but all the more targeted measures makes it clear the bank feels under pressure to do something, even if a good number of the committee feel there are limits to monetary policy,” said Simon Wells, chief U.K. economist at HSBC Holdings Plc. “If voting for an extra 25 billion is something to demonstrate some action before the governor goes, it smacks potentially of a futile gesture.”