The Bank of England inched closer today to launching a second round of quantitative easing, after two policymakers unexpectedly dropped their calls for higher interest rates against a backdrop of rising unemployment.
BoE chief economist Spencer Dale and former academic Martin Weale - who had called for tighter policy for the past six months - voted with the majority to keep rates at a record low this month, largely due to a darkening economic outlook.
"The slowing in world demand growth and the heightened tensions in financial markets meant that the balance of risks to the medium-term inflation outlook had clearly shifted to the downside," minutes to the BoE's August 3rd-4th monetary policy committee meeting said.
Only long-standing dove Adam Posen has called for more quantitative easing this month, but other policymakers considered it and said further asset purchases might be needed if risks to Britain's economy materialised, the minutes showed.
British government bond prices rallied and sterling fell after the publication of today's minutes, which coincided with official data showing British unemployment rose at its fastest pace in more than two years in July.
"The hawks have thrown in the towel at last," said Nida Ali, an economic advisor to accountants Ernst & Young. "More quantitative easing has gone from being a mere back-up option to being a genuine possibility in the near future."
Britain's government has embarked on a five-year austerity plan to erase a massive budget deficit, leaving no room for extra spending to boost the economy, and placing the onus on the Bank to act if the economy runs into trouble.
Most economists viewed the minutes as flagging a greater prospect of QE in future, but thought it was only likely to take place if the global economy takes a sharp turn for the worse.
"We see the 'bar' for additional quantitative easing as high with inflation still expected to reach 5 per cent over the coming months," said David Page of Lloyds Corporate Markets.
The BoE has held rates at a record-low 0.5 per cent since March 2009, and between then and January 2010 it bought 200 billion pounds of financial assets, mostly gilts, with newly created money.
The BoE's quarterly Inflation Report last week showed that inflation is still expected to peak at 5 per cent later this year - more than double the BoE's 2 per cent target - due to a supposedly one-off mix of higher sales tax and energy costs.
However, the BoE also cut its forecast for inflation in two years time, a key policymaking variable, to 1.7 per cent from 1.9 per cent, and cut its annual growth forecasts for the next eight quarters by about 0.4 percentage points on average.
The economy has barely grown over the past nine months and a slowdown in key export markets and a slump in consumer sentiment pose major headwinds to the fragile recovery.
BoE governor Mervyn King has said the euro zone debt crisis poses the single biggest threat to Britain's economy, and Wednesday's minutes showed the rest of the MPC shared his view.
"Members of the Committee held differing views about the extent to which those risks should influence the Committee's immediate policy decision. On balance, most members saw little merit in seeking to react to the possibility of these risks crystallising by adjusting monetary policy in advance," the minutes said.
Some MPC members are also concerned about upside risks to future inflation, particularly the danger that the long period of above-target inflation would damage public confidence in the BoE's commitment to keep inflation low.
"But recent developments had weakened the case for removing some of the monetary stimulus," the minutes said.
Today's labour market data showed that wage growth remains well below the rate of inflation, with average weekly earnings rising by an annual rate of just 2.6 percent in the three months of June.
Reuters
