From the minutes of the last Bank of England monetary policy committee meeting…
The Governor invited the Committee to vote on the proposition that:
- Bank Rate should be maintained at 0.5%;
- The Bank of England should finance a further £50 billion of asset purchases by the creation of central bank reserves, implying a total quantity of £175 billion of such asset purchases. The Bank should seek to complete the additional purchases within the next three months.
Six members of the Committee (Charles Bean, Paul Tucker, Kate Barker, Spencer Dale, Paul Fisher and Andrew Sentance) voted in favour of the proposition. Three members of the Committee (the Governor, Tim Besley and David Miles) voted against, preferring to increase the size of the asset purchase programme by £75 billion to a total of £200 billion.Yep, Mervyn King, together with Besley and Miles wanted the rate of monetary stimulus increasing, not just extending at the current rate of £50bn-a-quarter. That was good for half a cent off sterling versus the dollar and a third of a cent v the euro on Wednesday morning. Gilts, of course, spiked higher.
Here’s the big spender thinking:There were arguments in favour of a considerable expansion of the programme at this month’s meeting. The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously. Insufficiently stimulatory monetary policy would cause inflation to remain below the target for a sustained period of time, depressing inflation expectations, and might harm public confidence in the recovery causing it to falter. Confidence in the efficacy of monetary policy might also be damaged, limiting policymakers’ ability to stimulate the economy in future. In addition, if it became apparent that monetary policy had been overly expansive, policy could be tightened by a combination of asset sales and increases in Bank Rate.And here’s the cautionary reply:
But there were also arguments for a more moderate expansion of the programme, given that some of the most immediate downside risks to the economy seemed to have receded. The channels through which large-scale asset purchases affected the economy, and the magnitude and speed of those effects, were uncertain. The substantial injections of liquidity into the economy might result in unwarranted increases in some asset prices that could prove costly to rectify or in inflation expectations moving upwards. Moreover, if the asset purchases proved to be more effective than anticipated, an early withdrawal of some of the monetary stimulus might prompt a sharp rise in market interest rates that was unwarranted by the economic outlook.
Related links:
Minutes of the Monetary Policy Committee Meeting 5/6 Aug — Bank of England
The BoE’s deflation fear – FT Alphaville