Bank of England split drives talk of further QE by spring

Sir Mervyn King, main picture, and MPC members Paul Fisher, left, and David Miles were in a minority over QE. Picture: PA
Sir Mervyn King, main picture, and MPC members Paul Fisher, left, and David Miles were in a minority over QE. Picture: PA
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OUTGOING Bank of England governor Sir Mervyn King surprised the markets yesterday by calling for more money to be pumped into the struggling British economy.

Analysts believe that the central bank could restart its programme of quantitative easing (QE) or launch fresh stimulus measures as early as the spring, despite fears the move could stoke 

The prospect of further intervention came after minutes of the bank’s 
February meeting – published yesterday – showed that rate-setters came 
surprisingly close to taking more action to support growth.

The bank’s monetary policy committee (MPC) was split 6-3 at the meeting, with the three dissenting voices – King, Paul Fisher and arch-dove David Miles – pushing for a £25 billion increase in QE to £400bn.

The swing in the governor’s views provided the sharpest divergence in opinion since June last year, when a split vote was followed the next month by a £50bn boost to QE.

It is also only the fourth time that King has been outvoted since he took office in 2003.

Policymakers face a tricky balancing act amid mixed signals on the health of the UK economy.

Figures yesterday revealed a fresh fall in unemployment but economists fear additional fallout from public sector cost-cutting, the continued squeeze on disposable incomes and a troubled British high street.

David Kern, chief economist at the British Chambers of Commerce, said the minutes signalled increased pressures for more QE “in the near future”.

“It is widely assumed that incoming governor Mark Carney favours more aggressive, expansionary policies,” Kern noted. “The minutes suggest the MPC may move in this direction even before his arrival [in July].”

Howard Archer, chief UK economist at forecasting group IHS Global Insight, said QE could be on the way as soon as the second quarter or shortly after 
Carney takes up his post.

“With economic activity likely to remain fragile and limited, we believe that the Bank of England will eventually decide to give the economy a further helping hand with some more QE,” he added.

The stock market held at its five-year highs, but the pound slumped to an eight-month low against the dollar and touched 16-month lows against the euro.

Craig Erlam, market analyst at Alpari, said: “I expect to see the pound continue to weaken in the coming weeks, not only due to the prospect of more asset purchases but also because the additional support for an increase is a clear sign that the economy is barely going to grow this year, if at all.”

At this month’s meeting, the MPC voted unanimously to keep interest rates at the record low 0.5 per cent where they have been since March 2009.

However, the possibility of a further reduction was discussed, according to the minutes, as well as measures in 
addition to QE and the £80bn Funding for Lending Scheme (FLS), such as 
increasing credit from non-bank lenders.

More targeted interventions to aid the recovery could be “entertained”, but MPC members said many of these fell within the remit of other UK authorities.

Another option looked at was reducing the marginal rate of interest that banks receive on their reserves held at the BoE, which would encourage banks to use more of these reserves for lending.