King Defeated in QE Push as Officials Downplay Remit Change
Bank of England Governor Mervyn King was defeated for a third month in a push for more stimulus as officials signaled the change to their remit hasn’t altered their approach to policy in light of current risks.
Six of the Monetary Policy Committee voted to keep quantitative easing at 375 billion pounds ($575 billion) this month, the central bank said in the minutes of the panel’s April 3-4 meeting, published in London today. King, David Miles and Paul Fisher wanted to increase it by 25 billion pounds.
The meeting was the first for the MPC since Chancellor of the Exchequer George Osborne reworked the BOE’s mandate to give officials more flexibility to meet their 2 percent inflation target. In the minutes, the MPC said Osborne’s move “confirmed” their decision to look through the bout of above- target price growth at a time of economic weakness.
“The short-run trade-off between output growth and inflation meant that the committee could return inflation to the target more quickly than currently expected only by taking policy actions that would provide less support to output,” the MPC said. “In responding to this trade-off, the committee was setting policy in broadly the same way it had done since its formation.”
The comments echo remarks by individual MPC members in recent months that they have always interpreted their mandate flexibly to avoid shocks to the economy.
A separate report today showed unemployment rose at its fastest pace in more than a year. Unemployment as measured by International Labour Organisation methods rose by 70,000 to 2.56 million in the three months through February, the most since November 2011. The unemployment rate climbed to 7.9 percent from 7.8 percent in the previous quarter.
The pound remained lower against the dollar after the data. It traded at $1.5321 as of 9:34 a.m. London time, down 0.3 percent on the day.
At the April meeting, the MPC majority said monetary policy was already “highly stimulatory” and noted that medium-term inflation expectations “had drifted upwards in recent months.”
“A further easing might exacerbate this movement and prompt renewed weakness in sterling, with implications for wages and prices,” they said. Inflation was at 2.8 percent in March.
The majority also noted that the impact on supply capacity from a demand increase would depend on how the reallocation of capital and labor occurred. They said this issue “was better addressed by policies to improve the working of credit markets.”
The MPC said that there had been some signs that the pace of improvement in credit conditions had eased. It said it “saw merit” in possible extensions to the Funding for Lending Scheme “that would boost lending further.”
For the minority of the MPC, their argument was that more QE could lower longer-term interest rates, support asset prices and “facilitate a smoother path toward the economy’s new equilibrium, help prevent a more persistent reduction in spending and thereby avoid potentially lasting damage to productive capacity.”
On inflation, the MPC forecast it will accelerate to around 3 percent by the middle of the year. It said that administered and regulated prices “were likely to make unusually large and sustained contributions to inflation over the next two years or so.” Still, it saw price growth slowing to the target in the medium term.
On the economic outlook, the MPC noted the threats from the euro-area crisis and the government’s fiscal squeeze.
It said the market reaction to developments in Cyprus has been “relatively limited,” though “some market moves could be interpreted as suggesting that the Cyprus bailout had demonstrated a greater commitment by the euro-area authorities to shift the burden of future banking sector restructuring from governments to private creditors.”
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