Outvoted

Bank of England Governor Mervyn King, had this month been outvoted by fellow policymakers when it comes to the idea of pumping more money into the economy.

Minutes from the latest meeting of the Bank’s Monetary Policy Committee (MPC), show that Mr King wants to inject £75 billion into the economy instead of the £50 billion that was injected. Two other committee members also voted for a larger cash injection.

However, the decision reached was to pump £50 billion into the economy – a surprise as this is twice the amount that the market expected.

Initially, the Bank set aside £150 billion for buying assets. The decision to inject another £50 billon will take the total to £175 billion.

The governor, backed by Tim Besley and David Miles voted for a £75 billion expansion. They argue that too little stimulation would mean inflation remains below 2% for a “sustained period of time… and might harm public confidence in the recovery, causing it to falter.”

Too Much, Or Not Enough?

They also claim that if £75 billion proved too much, they could always reverse the policy by selling assets and increasing interest rates.

Because of the minutes, the value of the Sterling fell sharply. It fell 1% against the dollar, and 0.8% against the euro.

The Bank has previously been buying assets from financial institutions in order to get some more money back into the economy, with the aim that these institutions would then lend some of the money they made to businesses and individuals. Thus, in turn, boosting spending and helping the economy out of the recession.

Following the committee meeting earlier in the month, the Bank issued a statement saying that the recession in the UK “appears to have been deeper than previously thought.”

But the split within the MPC shows that views differ on just how deep the recession is, and the outlook for inflation.

‘Promising Signs’

Analysts warn the different views mean the Bank might pump even more money into the economy: “It was surprising we had three members looking for £75 billion,” said Peter Dixon of Commerzbank.

“This clearly suggests the Bank is leaving the door open for additional measures should they feel need arise. Quantitative easing is still very much in play.”

Capital Economics said the minutes “gave a strong signal that QE might yet be extended even further.”

The committee also noted that stock markets had increased, and that the rate at which banks lend to each other had fallen. On top of this, it says there are “promising signs” that quantitative easing was “having a positive impact”.

Even then, the committee warns lending conditions will remain tight and economic activity weak and the “recovery in global demand remained susceptible to further shocks,” which would most likely lead to “a slower recovery in the level of economic activity.” Therefore more action needs to be taken.

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