Bank of England split on more QE as Governor Mervyn King over-ruled

The Bank of England’s fears for the health of the UK economy have been laid bare by a split among policymakers that saw the Governor over-ruled for only the fourth time after he voted for more quantitative easing.

Three MPC members voted to increase QE by £25bn to £400bn – including Sir Mervyn King Photo: PA

The pound fell sharply as the markets reacted in shock to minutes from this month’s Monetary Policy Committee (MPC) meeting, which revealed that three members voted to increase QE by £25bn to £400bn – including Sir Mervyn King. Last month, only David Miles wanted to restart the printing presses.

The decision took traders by surprise as the Bank last week raised its forecasts for inflation from those made in November, warning that inflation would hit 3pc later this year and not fall back to the 2pc target until the beginning of 2016. Under normal conditions, the Bank would be expected to consider raising interest rates to offset such a rise.

The Bank has said it would tolerate the inflation overshoot, but few economists expected the MPC to encourage it. They had expected Mr Miles to be the only policymaker calling for more QE, so the decisions of both Sir Mervyn and Paul Fisher, the Bank’s executive director for markets, to join him raised the prospect of action next month.

George Buckley, UK economist at Deutsche Bank, said: “It would seem that the bar to easier policy is somewhat lower than we had originally expected.” The committee voted unanimously to hold rates at 0.5pc and to reinvest the £6.6bn of QE gilts that mature in March.

The Bank’s apparent concerns about growth were echoed by Pier Carlo Padoan, chief economist at the Organisation for Economic Co-operation and Development. Writing in Prospect magazine, Mr Padoan said it was “hard to foresee a strong rebound” this year.

He added that more QE “may be needed if growth fails to gather momentum”, calling for more infrastructure spending – in particular on energy and housebuilding – and to reform corporation tax “to stop multinationals shifting their profits offshore”. He also urged business “with support from government, to be more ambitious abroad, especially in high-growth emerging countries”.
The minutes showed that the Bank had considered a wide variety of policies in the February meeting, including a possible extension of the Funding for Lending (FLS) cheap credit scheme to “non-bank lenders”. Using QE to buy assets other than gilts and a reduction in interest rates below 0.5pc were discussed and, once again, dismissed.
Other “potential policy measures” that would involve the Bank acting with either the Treasury, like the FLS, or the Financial Services Authority, such as current plans to strengthen banks’ capital positions, were countenanced as well.
The MPC also appeared to push the Treasury to do more for growth. “A number of more targeted interventions to boost demand and the supply capacity of the economy might be entertained, but many of these fell to other UK authorities,” the committee said.
Ed Balls, the shadow chancellor, said the words were “a clear message to George Osborne to act”.