Bank of England votes against another cash boost for now

LONDON Thu Nov 8, 2012 10:28pm GMT

People walk and jog past the Bank of England, London June 15, 2012. REUTERS/Paul Hackett

People walk and jog past the Bank of England, London June 15, 2012.

Credit: Reuters/Paul Hackett

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LONDON (Reuters) - The Bank of England opted on Thursday not to pump more cash into the fragile economy, as policymakers pin their hopes on the bank's new lending scheme and some worry about inflation.

The decision, which matched expectations, is likely to have been close, with the BoE's Monetary Policy Committee having to weigh Britain's surprisingly strong exit from recession in the third quarter against signs of renewed weakness since then.

And more money-printing is still on the cards, with analysts polled by Reuters forecasting another 50 billion pound dose in the first quarter of 2013 to support the nascent recovery.

"We are pretty sure that the economy will need more stimulus in the months ahead," said Vicky Redwood at Capital Economics.

"And we do not think that the committee is out of firepower yet. In any case, conceding that there is nothing more it can do would hardly help confidence."

Several MPC members have voiced doubts about the continued effectiveness of its asset-buying programme in boosting the economy.

Redwood said that more gilt purchases were still likely in the near term, but afterwards "the MPC will have to venture into even more unconventional territory", for example buying private-sector assets.

After a two-day meeting, the MPC voted not to buy more British government bonds, having already bought 375 billion pounds' worth since the 2008-09 economic slump. It also kept its main interest rate at the record-low 0.5 percent, as predicted.

Sterling hit a five-week high against the euro after the Bank announcement, while gilts fell.

Attention will now turn to the quarterly inflation and growth forecast updates in the Bank's Inflation Report, which Governor Mervyn King will present on November 14.

Britain has not fully recovered the output lost in the wake of the financial crisis, while the euro zone's debt problems, government tax hikes and spending cuts to reduce the budget deficit and banks' reluctance to lend are all weighing on the economy.

Just three weeks ago, economists saw a 60 percent chance of another round of quantitative easing being unveiled this week.

But when they were asked the same question last week, in the wake of data showing British GDP growth of 1 percent between July and September, that probability fell to 40 percent.

Last month, Martin Weale said another round of quantitative easing might not be compatible with the bank's inflation target, while Bank chief economist Spencer Dale noted that inflation was sticky.

Inflation eased to 2.2 percent in September, holding above the 2 percent target even before hefty price rises by four of Britain's biggest energy suppliers kicked in.

Central bankers hope their new Funding for Lending Scheme will get credit flowing to households and businesses, but it may take another few months for its effects to show through.

The Bank will release the minutes of the latest meeting on November 21.

(Editing by Hugh Lawson)

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Comments (5)
DR9WX wrote:
If inflation is 2% then interest on savings should be at least 2%.

Any less and we are being robbed.

If interest on savings is 2% then interest on mortgages should be a fraction of 2%. Fractional reserve banking should work both ways!

I suspect most people reading the above would believe me to be financially illiterate. One of us is……………………….

Nov 08, 2012 12:49pm GMT  --  Report as abuse
DR9WX wrote:
Banks are allowed to loan money into existence. They create money when you sign for a loan. Which you pay interest on.

If they create 10 times more money than they have and loan it all out. They aren’t getting 4% on the original deposit, they are getting 40%. Thus they are being exceptionally greedy and we are being exceptionally stupid.

If inflation is 2% then savings interest could easily be 4%.
Mortgage interest could easily be 1%. The bank is still making money.
The fractional reserve banking mechanism means that they are not getting 1% income from mortgage lending but 10%.

Sounds like nonsense, it is. It is also how we are being fleeced.

Go on, spend an hour thinking this through.
Research fractional reserve banking.
Don’t be financially illiterate.

Nov 08, 2012 1:17pm GMT  --  Report as abuse
DR9WX wrote:
Hi, I have thought of a clearer example.

I open a bank offering 5% interest on deposits.
I soon have £100,000 in deposits.
I can now legally loan out £1,000,000 (with a 10% fractional reserve.)

My mortgage rate is 1%. I will soon be rich.

I make 1% on £1,000,000 which is £10,000
I pay out 5% interest on £100,000 which is £5,000

I make £5,000

Now if I tweak mortgage rates to 4% and reduce interest payments to 0.5% and reduce my fractional reserve to 0.002% rather than 10%. Well you do the arithmetic.

Answers below please.

Nov 08, 2012 1:36pm GMT  --  Report as abuse
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