Bank of England policy makers who voted to hold fire on stimulus yesterday will have more legitimacy to act in a month if Chancellor of the Exchequer George Osborne changes their remit and clears the path for more loosening.
Inflation that remains in breach of the BOE’s 2 percent target may have stayed officials’ hand before the March 20 budget, when the chancellor traditionally reaffirms the mandate. With Mark Carney having started a debate on new tools before he replaces Governor Mervyn King on July 1, Osborne may give the BOE license to act sooner by loosening its goal.
“Persistent above-target inflation could have been preventing them from doing more QE,” said Simon Hayes, an economist at Barclays Plc in London and a former central bank official. “If the government comes out and says you needn’t be concerned about that, then come the April meeting you’re in a different position. One of the constraints might be lifted.”
The nine-member Monetary Policy Committee held its target for bond purchases at 375 billion pounds ($564 billion) yesterday, as forecast by 29 of 39 economists in a Bloomberg News survey. The remainder predicted an expansion after King and two other MPC members were defeated in a push for more stimulus last month.
The pound traded at $1.5040 as of 10:58 a.m. London time, up 0.2 percent from yesterday. Sterling has dropped about 7.5 percent since the start of the year.
While inflation has been above target for more than three years, the MPC had scope to expand bond purchases during that time as its forecasts showed price gains would slow to the goal within two years.
The BOE’s latest projections show inflation in breach of the target until at least the end of 2015, beyond the normal horizon, and that may have stayed the hand of the majority this month, economists say. Minutes of the decision -- showing how officials voted -- will be published March 20, three hours before Osborne delivers his annual budget in Parliament.
While the chancellor by law has to state the remit at every budget, the backdrop to this year’s statement has shifted. Carney has said the current task of monetary policy is to ensure that economies achieve “escape velocity,” while he’s also promoted flexible inflation targeting and floated the idea of targeting nominal gross domestic product.
Osborne and officials at the Treasury are considering the debate sparked by Carney, who will be the first foreigner to lead the BOE in its 300-year history. The chancellor hasn’t yet decided whether any changes will be presented at the budget, a spokesman said yesterday.
The MPC “may be waiting to see what happens,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “Given that Carney’s said there’s a need for a debate, it could be the chancellor announces a consultation first. That means the remit can be changed in time before Carney arrives.”
Dario Perkins, an economist at Lombard Street Research in London, said any alteration to the mandate isn’t likely to produce a radical change.
“I spent a significant chunk of my career at the Treasury and I struggle with the concept of Treasury radicalism in this area,” he wrote in a research note. “The most likely change would be to alter the time horizon over which the inflation target applies.”
While the ongoing question of the mandate and policy tools may have played a part in the MPC’s decision, the economic backdrop will also have guided the thinking.
Markit Economics said its services, manufacturing and construction surveys indicate the economy will resume growth this quarter after a 0.3 percent contraction at the end of 2012. The British Chambers of Commerce said talk of a triple-dip slump is “misguided” and the true picture is “one of stagnation and not recession.”
And while a weaker pound benefits manufacturers by boosting export competitiveness, it also fuels domestic inflation by raising import costs. Sterling has dropped about 6 percent since the start of the year on a trade-weighted basis.
“There was probably enough for the majority to refrain from more easing,” said Joost Beaumont, an economist at ABN Amro Holding NV in Amsterdam. “With inflation above target for a third year, it’s wise to wait and see what happens.”
Part of the restraint on the economy is coming from Osborne himself as he presses on with a fiscal squeeze to reduce the budget deficit. Prime Minister David Cameron yesterday rejected suggestions that cutting taxes or increasing government spending would help the struggling economy, saying the risk of higher interest rates is too great. He also called on the central bank to aid growth.
“We are supporting these reforms with what I call monetary activism,” he said. “The Bank of England must support the recovery without putting financial stability at risk.”
Michael Saunders, chief western Europe economist at Citigroup Inc. in London, said the MPC’s reluctance to loosen even with weak economic growth may “reinforce the likelihood that the chancellor changes the remit to ensure a more flexible approach.”
For Beaumont -- who doesn’t expect more QE -- just maintaining the current loose policy settings already requires a flexible interpretation of the mandate.
“They’ve already implemented the flexible targeting that Carney likes, and that Osborne may announce in the budget,” he said. “It now needs to be rubber-stamped by the government.”