Bank dissent reinvigorates prospects of more QE
LONDON (Reuters) - The chances of more Bank of England asset-buying to support a fragile economy grew on Wednesday when minutes of February's policy meeting showed two officials sought a bigger increase this month in quantitative easing than was eventually agreed.
However, the split among the nine policymakers seems to run deep as some considered doing nothing, worried that inflation may turn out higher than the central bank expects.
Many economists had judged that the momentum for more stimulus was fading after quarterly forecasts last week showed that the Bank expected inflation significantly closer to its 2 percent target in two years time than predicted in November. In addition, the economy increasingly is showing signs of recovery.
But news that David Miles joined long-standing dove Adam Posen in voting for a 75 billion pound boost, rather than the 50 billion pound increase favoured by the rest of the Monetary Policy Committee, reopened the debate about whether the Bank will add further QE once the current round is complete in May.
"There is clearly still a dovish bias there. That leaves us a bit more comfortable with our forecast for another 50 billion pounds QE in the second half of this year," said Ross Walker, an economist at Royal Bank of Scotland.
Sterling fell and gilt prices rose as markets priced in a higher chance that the Bank's total asset purchases - which overwhelmingly consist of gilts - would rise beyond the 325 billion pounds approved at the MPC's February 8-9 meeting.
Posen and Miles argued there was a risk of a "prolonged period of depressed demand" causing inflation to fall materially below target. Moreover, extra QE now would reduce the risk of long-term unemployment rendering jobseekers unemployable, and of firms deciding to permanently scrap moth-balled capacity.
Data from the Bank's network of regional offices on Wednesday showed that although consumer demand and factory production was rising slowly, firms were scaling back hiring plans and growth in exports was weakening - particularly those for the euro zone.
However, most MPC members thought a bigger increase than 50 billion pounds "risked sending a signal that the Committee thought the economic situation was weaker than it was," and that both 50 and 75 billion pounds of QE were sufficient to ensure inflation did not significantly undershoot its target.
The Bank's central forecast is for Britain's economy to suffer a sluggish recovery in the first half of the year after its 0.2 percent contraction at the end of 2011, before returning to moderate growth in the second half.
Moreover, some of those voting for a 50 billion pound increase said that there had been a case for doing nothing.
Inflation hit a three-year high of 5.2 percent in September, and although it has since fallen to 3.6 percent, the Bank said its future path was uncertain.
Upward risks included disruption to the supply of oil and gas and the danger of upward wage or price-setting behaviour by companies against a backdrop of weak productivity growth.
Last week Posen said that UK monetary policy and forecasts appeared to be on the right track. And in a speech in Glasgow late on Tuesday, deputy governor Charlie Bean forecast a return to modest growth, albeit after a sluggish first half to 2012.
(Reporting by David Milliken; Editing by Ruth Pitchford)
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