Bank of England voted 7-2 to freeze interest rate
The Bank of England’s Monetary Policy Committee judged the growth outlook had weakened and some members raised the possibility of future quantitative easing, minutes to its June 8-9 meeting showed on Wednesday.
The MPC voted 7-2 to keep rates on hold at 0.5 per cent, with new MPC member Ben Broadbent as expected choosing to vote with the majority and not follow the lead of his predecessor, Andrew Sentance, in calling for higher rates.
“On balance, the Committee judged that the downside risks to the prospects for medium-term inflation had increased over the month,” the minutes said.
Most members judged that current growth weakness was likely to last longer than previously thought, and that the latest data suggested that growth was likely to remain below its historic average in the middle of the year.
“For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised,” the Bank said.
The Bank bought 200 billion pounds of financial assets – mostly government bonds – with newly created money between March 2009 and February 2010.
MPC member Adam Posen maintained his vote for an immediate extra 50 billion pounds of quantitative easing. His MPC colleague Paul Fisher flagged the possibility of more quantitative easing at an event on Tuesday if the central bank’s forecasts pointed towards deflation.
Last week Bank Governor Mervyn King warned that the financial crisis had triggered “seven lean years” – reinforcing analysts’ views that he is unlikely to vote for a rate rise any time soon.
However, some of those voting to keep rates on hold said that there remained a substantial upside risk to inflation over the medium term from current high inflation dislodging public inflation expectations — even if to date these expectations had proven more resilient than might have been predicted.
Bank chief economist Spencer Dale and fellow MPC member Martin Weale continued to vote for a 0.25 percentage point increase in rates to 0.75 per cent, although both accepted that forward-looking data on growth had been weak over the past month.
They said that productivity growth had been “abnormally weak”, raising the concern that inflation could be generated by smaller wage rises than in the past.
Broadbent, a former Goldman Sachs economist, had not been expected to follow the lead of his predecessor, arch-hark Andrew Sentance, who had consistently voted for higher interest rates since June last year.
In a parliamentary confirmation hearing, Broadbent came across as less hawkish than many had thought, though he also said the Bank had persistently underestimated the effect of rising commodity prices on inflation.
Before the minutes, money markets did not fully price in a rate rise to 0.75 per cent until the middle of 2012 – a sharp move from just three months ago, when a May rate rise was viewed as a likely option.
Economists, mindful of the mix of sluggish growth and inflation at a two-and-a-half year high of 4.5 per cent, on average predicted a rate rise at the tail end of this year in a Reuters poll at the start of the month.