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The Bank of England’s Monetary Policy Committee voted unanimously to hold rates at half a percentage point and to increase by £50bn the sums expended on asset purchases, although some members favoured an even bigger increase.
According to the minutes of its May 7 meeting released on Wednesday, the committee agreed that “the risks of stimulating demand too little at the current time seemed greater than the risks of stimulating it too much”.
The minutes show that the MPC also asked Mervyn King, Governor of the Bank of England, to write to the chancellor seeking to an increase in the initial £150bn upper limit for “quantitative easing” which was announced in March “should economic conditions warrant it”.
The minutes note that all members agreed that the asset purchase programme should be extended, and there was discussion about whether that increase should be £50bn or £75bn.
However, the group settled on the £50bn sum announced on May 7 because “the precise amount that would ultimately be required was so uncertain, there was no pressing need for the larger extension at this meeting,” the minutes note.
The committee noted that there were market expectations that the asset purchase programme would be extended and that failure to do when the economic outlook suggested that more action was needed could harm public confidence in the recovery. In the absence of further monetary stimulus, there was a risk that inflation could “significantly undershoot” the 2.0 per cent target in the medium term.
The MPC decided to keep the maturities of the gilts it purchases under review.
Separately, the Bank released its monthly agents’ report on business and credit conditions around the country. This found that leading UK banks’ appetite for lending had increased a little although credit remained tight.
There were also some signs of improvement on consumer spending, with contacts reporting the pace of contraction appeared to be slowing.
The minutes show that the MPC made its decision about rates and quantitative easing in light of projections that were about to be published in the Bank’s quarterly Inflation Report, and its conviction that the outlook for economic growth was “unusually uncertain”.
On balance, in spite of massive fiscal and economic stimulus, the MPC judged that all factors taken together pointed to a relatively slow recovery in economic activity.
It noted that there were some signs that the purchases of corporate paper in the form of commercial paper and bonds were providing some help to the badly impaired market for lending to businesses.
Spreads on commercial paper relative to gilts appeared to have fallen and were bunching around or below those offered by the Bank. Meanwhile, market contacts had become more positive about the impact of the MPC’s Asset Purchase Facility for corporate bonds, with bid/offer spreads on bonds eligible for purchase by the Bank narrowing.
The MPC noted that the purpose of its quantitative easing programme was aimed at stimulating the economy by providing a boost to lending.
The minutes show that the committee agreed that it would be too soon to see that in the data. “However, the shock to demand from collapsing confidence and the turmoil in financial markets appeared to have had a greater impact on economic activity than the committee had projected in February,” the minutes say.
However, the MPC noted signs of possible improvement coming from closely watched surveys such as those from CIPS/Markit and the CBI.