Policymakers seeking alternative ways to encourage growth after unanimous vote to keep QE programme at £375bn
Bank of England policymakers swung behind Mark Carney, the new governor, and voted unanimously against extending quantitative easing at this month's monetary policy committee meeting, amid signs that economic recovery is becoming "more firmly established".
David Miles and Paul Fisher, the two MPC members who had repeatedly backed Carney's predecessor Sir Mervyn King's calls for an extension of the deflation-busting policy, decided instead to switch their votes and support Carney's plan of leaving the size of the QE programme unchanged at £375bn.
The Bank's apparent retreat from QE under Carney's leadership came as Ben Bernanke, Federal Reserve chairman, used an appearance before the House of Representatives to reassure financial markets that his own plans to scale down monetary stimulus were not "on a preset course", and would depend on the health of the economy.
Bernanke sparked a sharp sell-off in financial markets and a spike in bond yields in May when he suggested that the Fed would start to "taper" its $85bn a month in bond purchases as the US recovery gathers pace. But in yesterday's hearing the chairman said: "Markets are beginning to understand our message and the volatility has obviously moderated."
The minutes of the Bank of England's July MPC meeting, published on Wednesday, suggested that with the recovery still fragile, rather than halting stimulus, it was examining the idea of using a different approach to try to kick-start growth.
By August, when the chancellor has asked the Bank to decide on whether it wants to alter its policymaking remit, the MPC aims to establish "the quantum of additional stimulus required and the form it should take".
That suggests that Miles and Fisher may simply have decided to wait for next month's meeting before pushing for a fresh round of QE – or backing an alternative, such as a public promise to keep rates low until the economy meets specific targets, an approach known as "forward guidance". , which the Canadian governor is known to favour.
"An expansion of the asset purchase programme remained one means of injecting stimulus, but the committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting," the minutes said.
Simon Wells, UK economist at HSBC, said: "We expected unanimity next month, when the MPC assesses the merits of forward guidance, but Mark Carney has already got it."
The MPC made a first foray into forward guidance at its meeting a fortnight ago, taking the unusual step of issuing a statement to financial markets warning them that interest rates were unlikely to rise.
When Carney was governor of the Canadian central bank, he pledged to keep interest rates low for 12 months, helping to calm fears in financial markets that borrowing costs were about to rise.
The minutes show that MPC members were concerned by the "surprising" rise in UK government bond yields that followed Bernanke's statement in May. In April markets had not been expecting UK interest rates to go up until late 2016; by the time the MPC met, that had been brought forward to mid-2015.
"UK developments, while broadly positive, had not been enough to warrant such an upward move in the near-term path of bank rate," the minutes said.
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| Bank of England governor Mark Carney plans to leave the size of the QE programme unchanged at £375bnPersistently weak real income growth – with high inflation more than outweighing paltry pay deals – was highlighted as a risk to the recovery by MPC members: "Real income growth had remained weak … and it was unlikely that consumption growth could continue at its current rate without some rise in real incomes." |
However, the MPC said, "developments in the domestic economy had generally been positive", and broadly in line with the moderately upbeat picture presented by King at his final inflation report press briefing. For "most members", therefore, "the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely", – subject to keeping inflation on track to hit the government's 2% target.
IMF boost for Osborne
George Osborne won a propaganda victory on Wednesday night as the IMF's powerful directors rejected its own economists' recommendations that the UK should slow the pace of spending cuts to boost recovery.
When the IMF announced the initial findings of its annual check-up of the UK economy in May, it caused a political storm by urging the chancellor to bring forward £10bn of infrastructure spending to avoid austerity becoming too much of a drag on growth.
But at a meeting on Monday, a big majority of the IMF's 24 directors – delegates from its member countries – spoke out against that proposal.
A statement released on Wednesday with the IMF's full findings on the UK, known as an Article IV, said: "Most directors underscored the importance of keeping fiscal consolidation on track to preserve credibility, not least in light of the persistent weakness of the fiscal position." However, Krishna Srinivasan, the mission chief for the IMF's UK assessment, said staff stood by their recommendations, despite the board's scepticism.
A Treasury spokesman said: "We thought they were wrong then, we still think they're wrong, and now it turns out most of the board agree with us."
But the IMF's report insisted that, "the economy remains a long way from a strong and sustainable recovery".
Article Source : http://www.guardian.co.uk
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