MPC split three ways over QE boost

Published on Wednesday 18 November 2009 20:26

THE door was left open to further quantitative easing yesterday after it emerged that Bank of England policymakers were split three ways over their decision on how to boost the economy this month.

Minutes of November's monetary policy committee (MPC) meeting also showed that members discussed cutting the rate of interest paid on commercial reserves held at the central bank.

But any move towards a zero or even negative interest rate on bank reserves risked turning the quantitative easing programme into "a tax on the banks", warned economic forecasting body, the Ernst & Young Item Club.

Most analysts had concluded earlier this month that the BoE's decision to halve the pace of its asset purchase scheme was a signal the programme was being wound down.

However, central bank governor Mervyn King said last week that the MPC was keeping an open mind.

Yesterday's minutes showed that while seven members of the nine-strong committee, including King, wanted a 25 billion expansion of QE, David Miles had called for it to be increased by 40bn "to provide greater insurance to the downside risks to growth and inflation".

Meanwhile, BoE chief economist Spencer Dale favoured no increase at all, arguing that more money pumped into the economy might fuel "unwarranted increases in some asset prices that could prove costly to rectify".

It is the first time the MPC has been divided three ways over quantitative easing.

In the end, the decision was taken to pump a further 25bn into the economy – bringing the total planned spending under the scheme to 200bn – while leaving interest rates pegged at their record low of 0.5 per cent.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said: "The door is clearly not shut on further quantitative easing, particularly given the major uncertainties and risks surrounding both the growth and inflation outlooks."

But he added: "We suspect that November marked the final extension to the programme unless the economy suffers a major relapse in 2010."

Jonathan Loynes, of Capital Economics, said: "The minutes of November's MPC meeting left the door to further monetary policy action to support the economy still slightly ajar."

Archer said news that the MPC was still thinking about changing the remuneration rate on commercial bank reserves – a topic much speculated on earlier in the year – was "potentially significant".

"While the MPC decided not to go down that route for now, it is clearly on the table in an attempt to try and get them to inject more liquidity into the financial system, for example by purchasing more short-term gilts," he added.