BoE chief wants asset buying

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London - Bank of England Governor Mervyn King and two other officials voted to restart government-bond buying earlier this month, showing the bank closer than expected to taking more action to lift economic growth.

Minutes of the bank's last meeting, released on Wednesday minutes also reveal the central bank is thinking about how to boost non-bank lending to the economy.

The pound fell to an 8-month low as the bank confirmed that it was in no hurry to force inflation back to its 2 percent target.

“The (policy) committee agreed that it was important to communicate clearly its willingness to bring inflation back to the target over a longer time horizon than usual,” the minutes said.

Britain's economy has been stagnant for two years, but the central bank now sees a sluggish recovery. Unemployment data released at the same time as the minutes again showed a record number of people in work.

Many economists had largely written off the chance of more asset purchases - or quantitative easing (QE) - especially after King last week stressed that monetary policy was near the limits of what it could do to boost growth. He also forecast inflation would remain above target until early 2016, even without additional stimulus.

But it now turns out that at the central bank's Feb. 6-7 Monetary Policy Committee meeting, King and Paul Fisher, the bank's executive director for markets, joined long-standing dove David Miles in arguing for an increase in bond purchases to 400 billion pounds ($618 billion) from 375 billion pounds.

“A case could ... be made for undertaking additional asset purchases at this meeting,” the minutes of the nine-member committee said. “The degree of slack in the economy, and the likely positive response of supply capacity to increased demand, meant that higher output growth would not necessarily lead to any material additional inflationary pressure.”

The policy committee also said that they still believed that asset purchases still had the ability to help the economy by lowering interest rates and encouraging investment in riskier assets.

February marks the fourth time King has been in a minority since he became governor in 2003. While unusual, it is not the shock it would have been be at most other central banks as MPC members are encouraged to make differences in view public.

The last time King was in a minority was in June last year - when there was also a 6-3 split - and in July a majority of the MPC joined King in backing a 50 billion pound increase in asset purchases.

“February's UK MPC minutes provide another clear demonstration of the committee's increasingly flexible approach to inflation targeting,” said Samuel Tombs of Capital Economics. “More QE is likely this year, particularly if GDP growth continues to fall short of the Committee's expectations.”

 

QUALIFIED QE

The support in the minutes for further asset purchases was more nuanced than in the past, however. The three policymakers supporting purchases were only calling for a modest 25 billion pounds extra - in contrast to the increases of 50 billion pounds that were more typical in the past.

And there was a general acceptance - in line with King's recent comments - that monetary policy alone will not get Britain's economy back on track.

The minutes cited the importance of the central bank's Funding for Lending Scheme, which opened in August and offers banks cheap finance if they lend more, as well as reiterating a call for British banks to strengthen their capital positions.

But there was also a hint that the bank may be looking at a new scheme to boost lending that bypasses banks.

“In addition to improving the supply of bank credit, the committee thought that consideration of measures to support the flow of credit more broadly, including from non-bank lenders, was also warranted,” the minutes said.

The central bank also said it would disregard upward price pressures from higher university tuition fees and energy levies.

Long-range communication is an approach favoured by Bank of Canada Governor Mark Carney, who will take over at the BoE when King steps down in July. Berenberg Bank economist Rob Wood said he expected more of this to come.

“We suspect the BoE's toe in the water on guidance will get more specific over the coming months. Specifically, we expect any further easing to be in the form of something closer to Fed-style guidance accompanied by more QE,” Wood said. - Reuters


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