BOE Was Split on Rate as Sentance Made First Push for Stimulus Withdrawal
Bank of England policy maker Andrew Sentance made the first push for an interest-rate increase in almost two years this month, opening a split among officials on the strength of the economic recovery.
The Monetary Policy Committee voted 7-1 to keep the benchmark interest rate at 0.5 percent, according to minutes of the June 10 decision released in London today. Sentance favored an increase to 0.75 percent, arguing that inflation was proving to be “resilient” after the recession.
“Despite current uncertainties, for this member, it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus,” the minutes said. “Other members thought that changes to the balance of risks were insufficient to warrant a change in the stance.”
Governor Mervyn King cautioned last week that the bank shouldn’t react to faster inflation based solely on energy-cost and exchange-rate fluctuations, after the annual pace of consumer-price increases reached a 17-month high in April. Officials have balanced the threat of inflation against the danger of contagion from Europe’s sovereign debt crisis.
The Federal Reserve will keep its target rate for overnight loans between banks at a record low range of zero to 0.25 percent today, all 97 economists surveyed by Bloomberg News said. Kansas City Fed President Thomas Hoenig has voted against all three of the Fed’s statements this year. He said in April that its pledge to keep the rate low for an “extended period” limits its “flexibility to begin raising rates modestly.”
The European Central Bank has added stimulus after it announced on May 10 it would buy government and corporate debt on the secondary market to reduce bond yields, which had soared in high-deficit countries such as Greece, Spain and Portugal.
The pound extended its gain against the dollar after the release of the Bank of England minutes and was up 0.5 percent to $1.4922 as of 11:14 a.m. in London. The yield on the 10-year gilt was little changed at 3.46 percent. It earlier approached yesterday’s trough of 3.41 percent, which was the lowest since Oct. 14, as falling stock markets boosted demand for the relative safety of fixed income.
The U.K. central bank’s policy makers voted unanimously to keep the size of their bond holdings at 200 billion pounds ($297 billion). They bought government securities from March 2009 until January this year to fight the recession.
The minutes signal a widening split on the committee on officials’ judgment of the outlook for consumer prices. While some policy makers said that the risk of inflation overshooting the 2 percent target had increased, others said that financial market developments pointed to a shift in the risks “slightly to the downside.”
The inflation rate rose to a 17-month high in April and was at 3.4 percent in May, above the government’s 3 percent upper limit. Bank of England officials predict it will fall in the aftermath of the economic slump. The pound has lost about a quarter of its value on a trade-weighted basis since the start of 2007, making imports more expensive, while the price of oil has gained 75 percent since the start of 2009.
“The bank will keep looking through all the temporary inflation pressures” and Sentance “is going to be a lone voice for a considerable period of time,” David Tinsley, an economist at National Australia Bank in London and a former Bank of England official, said in a telephone interview. “The balance of positions from the governor down is for ultra loose monetary policy for some time to come. I think there’s a higher chance of more quantitative easing than a rate hike” this year.
Chancellor of the Exchequer George Osborne yesterday lowered the growth outlook for 2010 and 2011 to 1.2 percent and 2.3 percent from 1.3 percent and 2.6 percent, respectively. He announced the forecasts as part of his emergency budget, which included spending cuts, a levy on banks and an increase in the sales tax to tackle the U.K.’s record budget deficit.
King on June 17 said officials will probably raise interest rates before selling bonds when they decide to remove stimulus in the economy. However, if the prospects for growth weaken due to the budget squeeze, “monetary policy could then respond,” he said. “A range of indicators point to spare capacity in the economy rather than excess demand.”
Prospects for the global economy are more upbeat, with the Organization for Economic Cooperation and Development on May 26 raising its 2010 global growth forecast to 2.7 percent, citing expansion in economies including China. Leaders of the Group of 20 nations will discuss so-called rebalancing at this week’s summit in Toronto after China’s June 19 signal that it will allow a more flexible yuan.
Sentance’s vote follows his prediction earlier this month that the bank’s policy makers face “interesting debates” in the second half of this year on how long to keep up stimulus.
“Surveys point to some upward pressure on public inflation expectations,” Sentance wrote in an article published June 13 in the Sunday Times. “There also appears to be less spare capacity in the economy than many had feared.”
Sentance, 51, has served on the MPC since 2006 and his current term expires in 2011. He was formerly chief economist at British Airways Plc and at the Confederation of British Industry, the U.K.’s biggest business lobby. He studied at the University of Cambridge and the London School of Economics.
In 45 monetary policy meetings Sentance has taken part in, he voted nine times to raise the interest rate, eight times for a reduction, and 28 times for no change.
The bank’s meeting this month was the first time since September 2006 that the rate-setting panel has met without its full complement of nine members, as the U.K. Treasury searches for a replacement for Kate Barker. Her term expired on May 31. A new official is due to be announced this month to start work on July 5, in time for the next decision on July 8.