LONDON (Reuters) - The Bank of England’s top policymakers remained split 6-3 against restarting its bond purchase programme for a fourth month in a row in May, amid signs that the economy is improving.
As widely expected, BoE Governor Mervyn King was outvoted in his penultimate monetary policy meeting before retiring, when he called again for an extra 25 billion pounds of asset purchases.
But most other officials on the Monetary Policy Committee worried that surprising markets could create doubts about the bank’s commitment to getting down inflation, as well as noting that growth prospects were stronger than three months ago.
“News on the month had on balance been favourable,” the minutes said. “For the first time since the February 2007 Inflation Report, the Committee had revised up its projections for output over the next three years, while revising down its projections for inflation.”
The BoE’s reticence to buy more assets contrasts with ongoing bond buying by the U.S. Federal Reserve - though some officials there have started to discuss turning off the tap - and a recent decision by the Bank of Japan to aggressively ramp up its stimulus.
Economists polled at the start of the month by Reuters saw a 55 percent chance of more BoE asset purchases at some point later this year. A major uncertainty is whether what many view as King’s flagship policy will find favour with his successor, Mark Carney, who takes over on July 1.
Carney has promoted long-term commitments to low interest rates during his time as Canada’s central bank chief, and Britain’s chancellor has tasked him with assessing the viability of this communication strategy in Britain.
The BoE’s minutes noted that the growth outlook remained poor, and that a worsening in the euro zone debt crisis posed a “major potential impediment” to Britain’s recovery.
May’s inflation report, released last week, showed that inflation was likely to rise slightly in the short term to just over 3 percent, but to be back at its 2 percent target in two years’ time, slightly sooner than previously thought.
Inflation data released on Tuesday showed a sharper than expected fall, dropping to 2.4 percent from 2.8 percent, though it has exceeded its 2 percent target since December 2009.
The central bank bought 375 billion pounds of British government bonds with newly created money between March 2009 and October 2012, but since then the central bank has focused more on its Funding for Lending Scheme, which aims to boost lending.
Changes to the FLS to increase its benefit for small businesses were announced late last month, though the MPC said their impact was likely to be “relatively modest” due to the low share of bank lending to smaller businesses.
The MPC were unanimous in voting to keep interest rates at the record low 0.5 percent where they have been since March 2009. Markets director Paul Fisher and external member David Miles joined King in voting for more asset purchases, also known as quantitative easing.
Reporting by David Milliken and William Schomberg