Minutes from the April meeting of the bank’s monetary policy committee (MPC), published yesterday, showed that only one member, David Miles, voted in favour of increasing the bank’s quantitative easing (QE) programme to £350 billion from its current level of £325bn.
In a further sign that QE is less likely in the short term, MPC member Adam Posen did not vote for an increase to the asset purchase programme, which the central bank uses to free up money in the economy by creating funds to buy up bonds and other assets from major lenders.
Posen has been an advocate of boosting QE for many months, and Caxton FX analyst Richard Driver noted: “Few would have expected Adam Posen to abandon his overly dovish stance and the market will be encouraged that he feels the UK economy is not in need of further help for now. This week’s rise in UK inflation clearly provides an insight into Posen’s rationale.”
Inflation figures for March revealed an unexpected increase in the consumer prices index (CPI) to 3.5 per cent, moving further from the bank’s 2 per cent target.
Paul Tucker, the Bank’s deputy governor for financial stability, said: “I think inflation might remain above 3 per cent throughout the second quarter of this year, and possibly into the second half of the year.”
The MPC also warned that a sharp fall in construction output and a loss of activity around the forthcoming jubilee bank holiday could trigger weaker-than-expected first-quarter GDP, following a 0.3 per cent drop at the end of last year.
Despite the spectre of reduced growth, the MPC was encouraged by a wide range of survey indicators and data for the powerhouse services sector, which point towards underlying growth in the first half of the year.
The rate of inflation is also likely to fall more slowly than previously expected as rising oil and gas prices, as well as duty increases in the Chancellor’s Budget, hike up the cost of living, the MPC said in the minutes.
Daniel Solomon, economist at the Centre for Economics and Business Research, said: “By keeping the base rate low and expanding the money supply the MPC is putting upward pressure on growth by making borrowing cheaper. At the same time, these policies put upward pressure on inflation, making it even more difficult for the bank to reach its inflation target.”
The nine-strong MPC voted unanimously in favour of holding interest rates at a record low of 0.5 per cent.
Howard Archer, chief UK economist at IHS Global Insight, said: “We maintain the view that interest rates will not rise until at least late 2013 and could very well stay put at 0.5 per cent until 2014.”
Meanwhile, the Bank of England dismissed reports that Mark Carney, governor of Canada’s central bank, had been informally approached as a possible candidate to succeed Sir Mervyn King, who retires as governor next year.
“The appointment of a new governor when Sir Mervyn King retires is a matter for the government, not the court of the Bank of England. The court has not approached anyone in connection with this appointment,” said Sir David Lees, chairman of the court of the bank.