King Defeated in QE Vote as BOE Raises Pound Concerns: EconomyJennifer Ryan
Bank of England Governor Mervyn King was defeated for a second month in a vote to expand stimulus as the majority of policy makers said more bond purchases may erode their credibility and push the pound lower.
The Monetary Policy Committee voted 6-3 to keep the target for buying at 375 billion pounds ($566 billion), the central bank said in minutes of its March 7 meeting, published in London today. King, David Miles and Paul Fisher wanted a 25 billion-pound increase, repeating their push from February. A separate report showed unemployment rose for the first time in a year.
The majority said that with inflation above the BOE’s 2 percent target, there was a risk that adding to stimulus “could lead to inflation expectations drifting upwards.” They also said it “might also lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.”
The pound is the second-worst performer after the yen this year among 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes. It’s dropped about 6.8 percent against the dollar and 5 percent versus the euro.
The currency’s weakness may stoke price pressures by boosting the cost of imports. U.K. inflation accelerated to 2.8 percent in February, the fastest pace in nine months. That marked the 39th month that it was above the BOE’s goal.
The minutes come less than a week after King said in an ITV News interview that the BOE isn’t trying to talk down the pound and that the currency is now “broadly stable.”
The BOE said today that it “remained appropriate to accommodate” the first-round impact on inflation from the weakness of sterling if it reflected “real factors,” such as the required rebalancing of the economy or an unwinding of haven flows as risk appetite among investors increased.
Still, it added that “prospective movements in the exchange rate that reflected perceptions that monetary policy would remain excessively loose, or that the MPC’s commitment to meeting the inflation target in the medium term was diminished, would be a different matter.”
The pound erased its decline against the dollar after the minutes were released. It was at $1.5131 as of 11 a.m. in London, up 0.2 percent from yesterday.
Bank of Canada Governor Mark Carney, who succeeds King in July, has sparked a debate on the BOE’s remit, promoting the idea of flexible targeting. Chancellor of the Exchequer George Osborne, who reaffirms the inflation target in the budget, may announce a change to the existing monetary framework today. He is due to speak in Parliament in London at 12:30 p.m.
The MPC majority “thought that the costs of more QE outweighed the benefits for now,” said Samuel Tombs, an economist at Capital Economics in London. Still, if there’s a remit change to allow “more aggressive monetary policy, then it may not be long before a majority are voting for more stimulus.”
On the outlook for the economy, the MPC said growth should pick up during the year, though it noted the “uncertain” global backdrop and the threat from continued “strains” in the euro area. The policy makers also said that inflation is “more likely” to remain above the 2 percent goal for much of the next three years.
“The committee would continue to watch closely for any signs that inflation expectations had risen to a point inconsistent with, or making more difficult and costly, the task of meeting the 2 percent inflation target,” the BOE said.
On the need for more asset purchases, the majority of the MPC said there were limits to what they “could be expected to achieve to support output when some banks and households were reducing their indebtedness and the economy needed to rebalance.” The minority argued the opposite, saying they could “facilitate a smoother path” of economic adjustment.
“To varying degrees, all members saw merit in each set of arguments,” the BOE said in the final section of the minutes. “But members drew different conclusions about the best policy setting to bring inflation back to the target in the medium term while continuing to support output and employment.”
David Tinsley, an economist at BNP Paribas SA in London, said the minutes “give the impression of fairly firmly set positions, with the exchange rate being a particular concern.”
“The forthcoming budget and potential new credit easing schemes, along with the potential change in the remit were probably hanging over the committee, making any great change in March unlikely,” he said.
Today’s report didn’t repeat some ideas floated last month for reviving the economy, such as a cut in the key interest rate from its current record low of 0.5 percent. Policy makers did note that their Funding for Lending Scheme gave a picture of “broadly flat” bank lending.
Still, “the outlook for new lending to households and businesses appeared more promising than the headline FLS numbers might suggest,” the minutes said. And, “perhaps as a consequence of the FLS, the housing market had continued to show some signs of thawing.”
In the labor-market report, the statistics office said that unemployment claims fell 1,500 from January to 1.54 million. The median forecast in a Bloomberg survey was for a drop of 5,000. In the quarter through January, unemployment measured by International Labour Organisation methods rose 7,000 to 2.52 million, the first increase since January 2012.
The figures are a blow to Osborne as he prepares to deliver another austerity budget. They suggest the labor market is slowing as the economy risks falling into a third recession in five years.
In the U.S., the Federal Reserve will complete a two-day policy meeting later today. Chairman Ben S. Bernanke has pledged to press on with a program buying $40 billion a month of mortgage bonds and $45 billion in Treasuries until the labor market improves “‘substantially.’’
The Fed chief will probably halt the unprecedented easing in the first half of next year after expanding central bank assets to a record of about $4 trillion, according to a Bloomberg survey. The FOMC plans to release a statement at 2 p.m. today in Washington.