Bank of England panel split on size of stimulus

AP News
Posted: Feb 22, 2012 6:01 AM
Bank of England panel split on size of stimulus

Bank of England rate-setters were divided this month on the vote to inject another 50 billion pounds ($79 billion) into the British economy, with two members arguing that a bigger stimulus was needed, minutes to their last meeting showed Wednesday.

The disclosure that two members of the Monetary Policy Committee were arguing for a larger injection stoked speculation that the Bank is not done with its controversial strategy of pumping more money into the ailing British economy. The pound fell by nearly half a percent following the release of the report.

However, the nine were unanimous in voting to keep the base interest rate at the all-time low of 0.5 percent.

February's vote raises the total stimulus authorized since the program began around two years ago to 325 billion pounds. The policy, known as quantitative easing, involves creating money electronically and using it to purchase government bonds and other high-grade assets.

Vicky Redwood, chief U.K. economist at Capital Economics, said the minutes "suggest that the committee's appetite for more QE is a bit greater" than the Bank's latest quarterly economic projections indicated.

Last week's publication of the Inflation Report had diminished market expectations that another stimulus would be sanctioned as soon as May when the current purchases are due to be completed.

Seven MPC members, including Bank governor Mervyn King, believed that the recent economic news indicated that growth might be stronger than expected in the near term, bouncing back from a 0.2 percent drop in GDP in the fourth quarter of 2011. Unemployment is also standing at a 17-year high rate of 8.4 percent and Moody's warned that it may strip Britain of its cherished triple A rating.

The other two members _ Adam Posen and David Miles _ pushed for a 75 billion pounds increase instead over concerns about the "considerable" spare capacity in the British economy and the scale of deleveraging which is still taking place. They also saw a risk of a prolonged depression in demand which could push inflation below the Bank's 2 percent target.

Although all nine MPC members voted for more stimulus, the minutes did show that some members said "a case could be made" for leaving policy unchanged in February.

The majority voiced some optimism over the euro area's recent handling of its debt crisis. What goes on in the eurozone is particularly important for Britain as it is the country's major trading partner. They also said that given market expectations, "a larger increase risked sending a signal that the committee thought the economic situation was weaker than it was."

How policy develops over the months ahead could hinge on how far inflation falls from its current annual rate of 3.6 percent. The Bank, whose primary objective is to keep inflation around the 2 percent mark, believes that price pressures will ease in the months ahead. A bigger than expected decline could sway members to back even more stimulus provided the economy remains in the doldrums.