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.
“They can afford to wait until November,” George Buckley, an economist at Deutsche Bank AG in London, said before the announcement. While Buckley forecasts that officials won’t expand of QE next month, it’s “going to be a close call,” he said.
Bank of England policy makers also left their key interest rate at a record low of 0.5 percent.
The European Central Bank will keep its benchmark rate at 0.75 percent today, said 48 of 52 economists in another Bloomberg survey. Four projected a 25 basis-point cut. The ECB will announce its decision at 1:45 p.m. Frankfurt time and President Mario Draghi holds a press conference 45 minutes later.
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.
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.
“The story has changed on inflation and next month, when they’re sat round the table, for some of them more QE is going to be a much harder call,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London and a former central bank official. “The grounds of that debate are getting put down now. November could easily be a split decision.”
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.”
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 as the “weak” economy constrains property demand, Halifax said today.
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.
Labor-market data have landed analysts and officials with a “productivity puzzle” as the economy continues to create jobs amid the slump. Employment increased 236,000 to a four-year high of 29.6 million in the three months to July, and jobless-benefit claims dropped in August. Broadbent said in September that job data may provide a better guide to the inflation outlook than changes in output.
Howard Archer, an economist at IHS Global Insight in London, said the threats to the U.K. mean that the odds are “heavily slanted” toward the BOE expanding QE again this year.
“The economy is currently showing some signs of improvement and inflation could be sticky over the coming months,” he said. Still, “it is extended weak economic activity rather than inflation that remains the greatest risk.”
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