BLBG:King Defeated in 6-3 Vote as BOE Raises Concerns on Pound
Bank of England Governor Mervyn King was defeated for a second month in a vote to expand stimulus as the majority of policy makers said more bond purchases may erode their credibility and push the pound lower.
The Monetary Policy Committee voted 6-3 to keep the target for purchases at 375 billion pounds ($566 billion), the central bank said in the minutes of its March 6-7 meeting, published in London today. King, David Miles and Paul Fisher voted for a 25 billion-pound increase.
The majority said with inflation above the BOE’s 2 percent target, there was a risk that adding to stimulus “could lead to inflation expectations drifting upwards.” They also said it “might also lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.”
Sterling has weakened against 14 of 16 major currencies tracked by Bloomberg this year and has dropped 7.2 percent against the dollar and 5.3 percent versus the euro. U.K. inflation accelerated to 2.8 percent in February, the fastest pace in nine months, from 2.7 percent in January. That marked the 39th month that price growth has been above the Bank of England’s goal.
The pound erased its decline against the dollar after the minutes were released and was at $1.5104 as of 9:34 a.m. in London, little changed on the day.
A separate report today showed U.K. jobless claims fell less than economists forecast in February and a wider measure of unemployment rose for the first time in a year.
Pound Decline
The BOE said that it “remained appropriate to accommodate” the first-round impact on inflation from the weakness of sterling if it reflected “real factors,” such as the required rebalancing of the economy or an unwinding of haven flows as risk appetite among investors increased.
Still, it added that “prospective movements in the exchange rate that reflected perceptions that monetary policy would remain excessively loose, or that the MPC’s commitment to meeting the inflation target in the medium term was diminished, would be a different matter.”
“The committee would continue to watch closely for any signs that inflation expectations had risen to a point inconsistent with, or making more difficult and costly, the task of meeting the 2 percent inflation target,” it said.
BOE Remit
The minutes come less than a week after King said in an ITV News interview that the BOE isn’t trying to talk down the pound and that the currency is now “broadly stable.”
Bank of Canada Governor Mark Carney, who succeeds King, has sparked a debate on the BOE’s remit and its inflation goal, promoting the idea of flexible targeting. Chancellor of the Exchequer George Osborne, who reaffirms the remit in the budget, may announce a change to the existing monetary framework today. He is due to present the budget in Parliament in London at 12:30 p.m.
On the outlook for the economy, the MPC said growth should pick up during the year, though it noted the “uncertain” global backdrop and the threat from continued “strains” in the euro area. It also said inflation is “more likely” to remain above the 2 percent goal for much of the next three years due to the weakness of the pound and “administered and regulated prices.”
On the need for more asset purchases, the majority of the MPC said there were limits to what they “could be expected to achieve to support output when some banks and households were reducing their indebtedness and the economy needed to rebalance.” The minority argued the opposite point, saying they could “facilitate a smoother path” of economic adjustment.
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
