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November 21, 2012 11:28 am
The Treasury’s decision to ease monetary policy this month by apportioning £37bn of the gains from the Bank of England’s money-printing operations has garnered the tacit support of all of the Bank’s Monetary Policy Committee.
The minutes of the MPC’s November meeting, released on Wednesday, show no one voted to offset the stimulus provided by the Treasury’s decision to grab the £37bn in income generated from gilt coupons the Bank holds as part of its programme of asset purchases, known as quantitative easing.
The grab acts as a shadow stimulus by reducing the amount of money investors need to hold in government bonds, leaving more cash free for other uses.
Instead, eight of the nine rate-setters voted to maintain the size of quantitative easing at £375bn despite being informed of the decision made by Treasury, which was announced the day after the November vote. One member of the committee, David Miles, voted for even more stimulus, calling for the Bank to buy another £25bn of gilts to take the size of the quantitative easing programme to £400bn.
The minutes said MPC members were “confident” the new cash management arrangements would not affect their ability to set monetary policy. The committee acknowledged, however, that the Treasury raid amounted to monetary stimulus.
Because of the fall in government spending implied by the raid, the Treasury decision “was likely to have an effect essentially similar to that of purchases of gilts by the APF [asset purchase facility], and so the transition to the new arrangements would imply a small easing of monetary conditions”.
The minutes indicated Mr Miles would have backed more asset purchases had it not been for the Treasury raid. Referring to Mr Miles’ vote, the minutes said: “The monetary easing caused by the new APF cash management arrangements implied that the required quantity of asset purchases was smaller than otherwise.”
The minutes left open the possibility of further asset purchases, saying there was “considerable further scope” for quantitative easing to lower yields on government and corporate bonds, as well as support other asset prices. However, the minutes also said “there was a question over the magnitude of the impact of lower yields and higher asset prices on the broader economy at the current juncture”.
A rate cut below the current record low of 0.5 per cent now appears very unlikely.
“Viewed against the backdrop of the Funding for Lending scheme, and the potential for building societies to play a material role in increasing lending, the Committee judged that it was unlikely to wish to reduce Bank rate in the foreseeable future,” the minutes said.
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