The Bank of England is close to launching a new round of monetary stimulus because of the worsening euro zone crisis, according minutes of its last policy meeting, which showed officials split 5-4 on the move, with Governor Mervyn King in favour.
The minutes show far stronger explicit support for more asset-buying quantitative easing than many economists had expected, and is the first 5-4 split on the MPC since June 2007. King was last in a minority in August 2009, when he also supported more QE than the majority.
Last month BoE policymaker David Miles was the only official to call for an expansion of quantitative easing - which is designed to help the economy by making borrowing cheaper - but economists had generally expected him to be joined by only one or two further members of the MPC this month.
King and external members Adam Posen and Miles both voted to increase quantitative easing by 50 billion pounds to 325 billion pounds. Paul Fisher, the BoE's executive director for markets, supported a 25 billion pound increase.
Moreover, it looks likely that there could be a majority for more QE as soon as next month.
“Most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target,” the minutes said.
“It's quite a surprise, we had thought there could be a number of members voting for more QE, (but) four of them was... clearly on the top end of expectations,” said Deutsche Bank economist George Buckley. “(It) suggests we're going to see more QE very soon,” he added.
Gilts outperformed German government debt after the news.
All members of the MPC believed that inflation was likely to be lower than the central bank forecast in May, when it predicted it would take until the second half of next yea r before inflation fell below its 2 percent target.
Data published on Tuesday showed that inflation fell unexpectedly to a 2-1/2 year low of 2.8 percent, further easing the way for the BoE to expand QE - possibly as soon as next month. The BoE decided in May not to extend QE purchases largely because inflation was proving slower to fall than expected.
Separately, official data on Wednesday showed the number of Britons claiming unemployment benefit rose unexpectedly in May, the latest sign of the economy's ill health.
The Office for National Statistics said the number of people claiming jobless benefit rose by 8,100 last month. Analysts had forecast a fall of 3,000 on the month.
In the BoE minutes, MPC members cited a fall in commodity prices and signs of less generous wage settlements as evidence of weaker inflation in the short term, and warned that risks to Britain from the euro zone debt crisis had intensified.
“The likelihood of a disorderly outcome looked to have increased, and that could, if it crystallised, have a significant effect on global demand and the stability of the banking system,” the minutes said.
Some MPC members had said they wanted to see the outcomes of Greek and French elections before deciding on more QE. Both took place last weekend.
Some also said instruments other than gilt purchases may be more appropriate to stimulate the economy. Last week the BoE and the government announced new liquidity measures and lending guarantees to support credit.
King, the governor, said in a speech last week that the economic outlook had darkened under a “black cloud” of worries about the euro zone debt crisis, and that the e case for further QE had increased. - Reuters