Bank of England officials voted to complete their latest round of stimulus amid intensifying dissent on inflation risks that threatens to cause a rift on future aid for the economy.
Governor Mervyn King’s nine-member Monetary Policy Committee left the bond-purchase target at 375 billion pounds ($604 billion), as forecast by all 40 economists in a Bloomberg News survey. By next month’s meeting, they’ll have finished spending the 50 billion-pound round they started in July, forcing a decision on whether more stimulus is needed.
Rising commodity costs are feeding price pressures, and policy maker Ben Broadbent has said the BOE’s capacity to add to quantitative easing is limited by faster-than-expected inflation. Chief Economist Spencer Dale warned last month of the risks from prolonged loose policy. Their stance may not be enough to overcome the views of a majority of officials who have said it’s likely that more stimulus will be required.
“Next month’s decision will take place against a background which might make members think a bit harder as to whether more QE is justified,” said Philip Shaw, an economist at Investec Securities in London. “We still expect the MPC to sanction a further 50 billion pounds, but the decision could be a close call.”
Bank of England policy makers also left their key interest rate at a record low of 0.5 percent.
The pound rose 0.4 percent against the dollar today and was at $1.6145 as of 2:35 p.m. Gilts declined, pushing the 10-year yield up 3 basis points to 1.71 percent. It fell to the lowest in more than three weeks yesterday as investors sought the relative safety of U.K. debt amid the euro-area turmoil.
The European Central Bank kept its benchmark rate at 0.75 percent today, as predicted by 48 out of 52 economists in a Bloomberg survey. Four projected a 25 basis-point cut.
“Economic growth in the euro area is expected to remain weak, with ongoing tensions in some euro area financial markets and high uncertainty still weighing on confidence and sentiment,” ECB President Mario Draghi said at a press confernce after the decision.
The Bank of Japan will keep its policy unchanged tomorrow, according to all 20 analysts in a poll. Governor Masaaki Shirakawa and fellow BOJ policy makers are meeting for the first time since Seiji Maehara was named economy minister Oct. 1. Maehara is pushing the BOJ to consider buying foreign bonds and said he plans to tomorrow attend the second day of the BOJ’s meeting, the first minister to do so since 2003.
In the U.K., the Bank of England’s Dale and Broadbent highlighted inflation risks in the past month, with Dale cautioning against “Pavlovian” calls for more stimulus.
“Prolonged and aggressive monetary accommodation, combined with increasingly unconventional policy tools, also comes with potential costs and risks,” Dale said.
The minutes of today’s decision, showing how each MPC member voted, will be released on Oct. 17. Deputy Governor Paul Tucker raised questions in an interview last week on the efficacy of more stimulus. “We still think QE works, even if in some respects it does not have the same bite it used to have,” he said.
U.K. inflation cooled to 2.5 percent in August. The BOE sees it averaging 2.1 percent in the first quarter of 2013 and reaching the 2 percent goal by the end of the year.
Policy makers, who will have new forecasts at their Nov. 8 decision, said last month that rising energy prices mean inflation is “less likely to fall back further during the second half” of 2012 than projected in August. While oil prices have eased since reaching $100 a barrel last month, they are still up about 15 percent from a 2012 low at the end of June.
As U.K. policy makers await signs of recovery, King said on Sept. 21 that the economy is likely to grow this quarter for the first time in a year after a 0.4 percent slump in the three months through June. Still, he said he wouldn’t use the phrase “green shoots.”
Bank of England policy makers are also monitoring their two-month-old Funding for Lending program and its impact on credit. The FLS is designed to encourage lending and promote growth by giving banks access to cheap funding.
The debt crisis in Europe, the U.K.’s biggest trading partner, is clouding the outlook, and recent reports have cast doubt on the strength of Britain’s recovery. Services growth slowed more than economists forecast in September, while manufacturing and construction shrank. House prices fell for a third month and will probably remain little changed into 2013 amid a “weak” economy, Halifax said today.
German factory orders probably slid 0.5 percent in August from the previous month, economists said in a survey before a report tomorrow. Australia reported August retail sales that were below economists’ estimates, while a gauge of service industries rose to a seven-month high in India. In the U.S., the Federal Reserve will publish the minutes of its Sept. 12-13 meeting later today.