BOE Votes 9-0 to Boost Bond Plan, Keep Rate at 0.5%

By Jennifer Ryan

May 20 (Bloomberg) -- Bank of England policy makers voted unanimously this month to extend their money-printing plan by 50 billion pounds ($78 billion) after initially debating whether to increase the program by more to fight the recession.

“For some members, a case could be made for a larger stimulus,” according to minutes of the bank’s May 7 decision published today in London. “But as the precise amount that would ultimately be required was so uncertain, there was no pressing need for the larger extension at this meeting.”

Governor Mervyn King said last week that the British economy may face a “slow and protracted recovery” from the nation’s worst recession in a generation. Inflation slowed more than economists forecast in April to the weakest level in 15 months, raising the prospect that deflation may take hold.

“There was a persistent degree of slack forecast for the economy, and a high probability that inflation, in the absence of a further monetary stimulus, could significantly undershoot the 2 percent target in the medium term,” the Monetary Policy Committee’s minutes said.

The pound was little changed after the decision, trading at $1.5517 at 10:05 a.m. in London today.

The nine-member panel has now committed to spending 125 billion pounds of newly-printed money on government bonds and corporate debt. Prime Minister Gordon Brown’s government has authorized the bank to spend a maximum of 150 billion pounds, and policy makers said they would ask King to seek permission for an extension “should economic conditions require it.”

Heart of the Matter

“They are almost certainly going to use up the final 25 billion pounds and they’ve opened up the possibility of moving even higher,” said Nick Kounis, an economist at Fortis in Amsterdam and a former U.K. Treasury official. “A recovery doesn’t necessarily mean that inflation will be where you want it. That’s the heart of the matter when they consider how aggressively they should step up quantitative easing.”

The panel discussed an extension of either 50 billion pounds or 75 billion pounds this month, the minutes showed. They agreed that the risks of giving the economy too little stimulus “seemed greater than the risks of stimulating it too much.”

If inflation accelerates faster than policy makers expect, they could remove stimulus by raising interest rates or selling assets, the minutes said.

“The committee was alert to such risks and would take effective action should they crystallize,” the minutes said.

The central banks’ new quarterly economic forecasts show growth resuming next year while inflation slows as low as 0.4 percent this year. The central bank predicted that inflation won’t reach the 2 percent goal by 2012, though the bank raised its forecast to 1.5 percent by the end of 2010, up from a February projection of 0.6 percent.

The U.K. economy contracted 1.9 percent in the first quarter, the most since 1979. Annual consumer price growth slowed to 2.3 percent in April as households’ energy bill fell and food costs dropped, the Office for National Statistics said yesterday in London.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net