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Outgoing Bank Governor voted to raise stimulus

BANK of England Governor Sir Mervyn King voted unsuccessfully and unexpectedly to provide immediate further stimulus to the ailing UK economy this month, it has emerged, raising significantly the chances of further action before long.

DOVE: Sir Mervyn King, who steps down this year, and Paul Fisher, joined David Miles to vote for a further injection of cash to boost the UK economy. Picture: David Jones
DOVE: Sir Mervyn King, who steps down this year, and Paul Fisher, joined David Miles to vote for a further injection of cash to boost the UK economy. Picture: David Jones

Sir Mervyn's vote was revealed yesterday with publication of minutes of the February 6 and 7 meeting of the Bank's Monetary Policy Committee. The news wrong-footed financial markets.

The pound, already under significant pressure as the UK economy stands on the brink of triple-dip recession, tumbled following the revelation that Sir Mervyn and Bank executive director for markets Paul Fisher had joined longstanding MPC dove David Miles in pushing for immediate further stimulus.

Sir Mervyn's vote to raise the quantitative easing (QE) programme by a further £25 billion to £400bn appears to highlight concern over continuing UK economic weakness, especially given the committee is forecasting annual consumer prices index (CPI) inflation will overshoot the 2% target on the favoured two-year time horizon.

Sterling finished London trading at $1.5299, down more than 1.3 cents on its previous close, as a poll by Reuters showed that economists now believe it is more likely than not that the MPC will increase the scale of QE before the year is out, in spite of above-target inflation.

The pound also tumbled against the euro. The single currency finished London trading at 87.28p, up half-a-penny on its Tuesday close.

In the snap poll of 50 economists, conducted after the MPC minutes were published, the median chance of further QE this year came out at 51%, up from 43% in a similar survey only last week. The mean probability of further QE this year came out at 55%, up from 48%.

QE is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds, funded through the issuance of central bank reserves.

Sir Mervyn, Mr Fisher and Mr Miles saw their push for immediate further QE defeated by their MPC colleagues in a six-to-three vote to hold the programme at £375bn two weeks ago.

All nine MPC members voted to hold UK base rates at their record low of 0.5%.

Setting out the views of those MPC members who saw a case for a further immediate rise in QE at the February meeting, the minutes state: "Further asset purchases, in part by acting to reduce longer-term interest rates and underpinning the value of a broad range of assets, could help the process of rebalancing the economy, and avoid potentially lasting destruction of productive capacity and increases in unemployment."

The surprise MPC vote in February signalled to economists that the Bank is looking to adopt a more flexible approach to targeting inflation.

Howard Archer, chief UK economist at consultancy IHS Global Insight, believed this apparent developing stance could be linked to the arrival of Bank of Canada head Mark Carney to succeed Sir Mervyn from July 1.

Mr Archer said: "While the seeming increasing willingness of the MPC to be flexible may well be driven by the ongoing struggles of the economy to develop even modest sustainable growth, one can't help but think that it is influenced by the arrival of Mr Carney as governor at the start of July."

In the Bank's latest inflation report, published last week, the MPC projected annual UK CPI inflation would be about 2.3% on its favoured two-year time horizon, based on market forecasts that base rates would not rise above their current record low of 0.5% before the end of 2014 and on the assumption that QE were held at £375bn.

Samuel Tombs, UK economist at consultancy Capital Economics, said: "February's MPC minutes provided another clear demonstration of the committee's increasingly flexible approach to inflation targeting.

"We continue to think more QE is only a few months away.

"For a start, no member voted to tighten policy, despite the fact the latest Inflation Report forecasts showed inflation on track to be well above the 2% target in two years' time. Indeed, the last time inflation was forecast to be above its target at this horizon, in May 2011, three members voted for higher interest rates."

UK gross domestic product dropped by 0.3% in the final three months of last year.

A further fall in the current quarter would mean the UK had recorded its third recession since 2008.

Contextual targeting label: 
Finance

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