King Defeated Again as BOE Majority Watches for Inflation

Bank of England Governor Mervyn King
While Bank of England Governor Mervyn King said that a recovery is now in sight for the British economy, he insisted at the decision that further stimulus was needed to fix slack in the labor market. Photographer: Simon Dawson/Bloomberg

Bank of England Governor Mervyn King was defeated for a fourth month in his bid to expand stimulus as the majority of officials cautioned against the danger of stoking inflation expectations.

Six members of the Monetary Policy Committee voted to keep quantitative easing at 375 billion pounds ($568 billion) this month, the central bank said in the minutes of its May 8-9 meeting, published in London today. King, David Miles and Paul Fisher maintained their campaign to increase stimulus by 25 billion pounds.

“There was tentative evidence that measures of medium-term inflation expectations were becoming more sensitive to short-term news in inflation,” the majority said, according to the minutes. “Financial markets were not expecting further asset purchases at this meeting and might, at the margin, reassess the committee’s tolerance of elevated inflation should additional stimulus be injected.”

In the central bank’s quarterly Inflation Report published last week, officials predicted that growth may accelerate to 0.5 percent this quarter from 0.3 percent in the first three months of the year. While King said then that a recovery is now in sight for the British economy, he insisted at the decision that further stimulus was needed to fix slack in the labor market.

Minority Review

“Output growth was unlikely to be rapid enough to allow this margin to start to close over the forecast period,” King and the minority argued. Also, “rebalancing was proving a greater drag on output in the euro area than previously thought, and persistent weakness there might lead to upward pressure on sterling.”

The pound dropped after the release of the minutes and separate data showing an unexpectedly large drop of 1.3 percent in retail sales in April from the previous month. The currency was down 0.4 percent today at $1.5086 as of 9:33 a.m. in London.

The officials disagreed on the implications to their eventual policy exit from a further expansion of stimulus. The majority said that more quantitative easing could create an “unwarranted narrowing” in risk premia and “complicate the transition to a more normal monetary stance” in the future.

“Further asset purchases now would facilitate an earlier normalization of the monetary stance when that become appropriate,” the minority said.

Rate Decision

All nine members of the MPC voted to keep the benchmark interest rate at a record low of 0.5 percent. The decision was King’s penultimate before he retires on June 30 and is replaced by Bank of Canada Governor Mark Carney.

Policy makers agreed that news in the past month had been favorable. They said that it was likely that growth at the end of the second quarter would be 0.7 percent higher than they had forecast in February.

“Nonetheless, the outlook for growth remained poor by historical standards, and it was likely that inflation would rise a little further in the short run and remain above the target for a further two years,” the officials said.

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