LONDON – The Bank of England expressed growing concern over Britain’s economy and came surprisingly close to backing another monetary stimulus in a move that piled further pressure on the pound.
Minutes of the last policy meeting of the Bank of England released Wednesday showed outgoing Gov. Mervyn King and two other members of the Monetary Policy Committee supported another cash infusion to revive Britain’s ailing economy.
However, King, Paul Fisher and David Miles, were outvoted by the six others, who preferred to keep policy unchanged.
Since 2009, the Bank of England has pumped 375 billion pounds ($579 billion) into the British economy. Under the program — commonly called quantitative easing — the bank buys government bonds from financial institutions in the hope they will use the proceeds to boost the economy.
King and the two others wanted to inject another 25 billion pounds, arguing the risks to inflation were limited. Inflation stood at 2.7 per cent in January.
“Although inflation seemed likely to remain above the 2 per cent target over the next two years, the degree of slack in the economy, and the likely positive response of supply capacity to increased demand, meant that higher output growth would not necessarily lead to any material additional inflationary pressure,” those backing another stimulus argued, according to the minutes.
King’s apparent willingness to allow inflation to remain above target has raised speculation that he and others are more flexible in their approach. This summer, King is due to be replaced by Bank of Canada Gov. Mark Carney, who has indicated he backs a more flexible inflation target.
“The MPC has shifted significantly in a more dovish, pro-active direction — in part we surmise to facilitate the transition towards Mark Carney’s term as governor,” said Ross Walker, an economist at the Royal Bank of Scotland.
The vote was a surprise — most economists were expecting only Miles to vote for further asset purchases. The pound took a pounding, falling over a cent to $1.5309.
There was unanimity in the decision to keep the bank’s main interest rate unchanged at the record low of 0.5 per cent.
Britain’s economy has flatlined over the past year and there are fears it may enter its third recession in four years. In the final quarter of 2012, the British economy shrank 0.3 per cent from the previous three-month period.
Even though the economy got smaller in the final three months of 2012, unemployment fell, official figures showed Wednesday.
The Office for National Statistics said unemployment fell 14,000 in the final quarter of last year to 2.5 million. The unemployment rate was 7.8 per cent, down 0.1 percentage point on the previous quarter.
Economists like Chris Williamson of Markit, have been scratching their heads, trying to explain why the economy has been generating jobs even though it is treading water.
“One of the most likely explanations of the so-called ‘productivity puzzle’ is that companies are either reluctant or unable to make big investments in new plant, machinery and equipment, perhaps due to the uncertain economic outlook or a lack of available finance, or a combination of both,” he said.
He suggested it is possible companies have taken on more staff — and that production has become more labour intensive.
“If this is the case, it is a worrying sign of deteriorating competitiveness for U.K. plc,” he said.
As well as trying to come up with growth-enhancing measures, British treasury chief George Osborne will be under pressure to plug a hole in the public finances after an auction of the next generation of mobile phone licenses reaped less than anticipated.
Britain’s communications regulator, Ofcom, said five companies won bids for the 4G spectrum, which will allow virtually seamless web browing and downloading from mobile devices.
The auction raised 2.3 billion pounds — much less than the 3.5 billion pounds estimated by the Office for Budget Responsibility, the government’s tax and spending watchdog. It’s also way lower than the 22.5 billion pounds raised in an auction of the 3G spectrum over a decade ago.
Ofcom said Everything Everywhere, which is jointly owned by France Telecom and Deutsche Telekom, Hutchison 3G U.K., Telefonica U.K., BT subsidiary Niche Spectrum Ventures, and Vodafone all won spectrum for the superfast airwaves.
Osborne is expected to present his budget next month.