By Jennifer Ryan
Aug. 20 (Bloomberg) -- For the first time in his career, Bank of England Governor Mervyn King wants a more expansive monetary policy than his colleagues.
King’s push to expand the central bank’s bond-purchase program to 200 billion pounds ($329 billion) was overruled by the Monetary Policy Committee, minutes of their Aug. 6 meeting published yesterday showed. On the 14 other occasions that King has lost a vote since the central bank was given rate-setting independence in 1997, he opted for tighter policy every time.
King, who led a global push by central banks to start buying bonds in March, argues that too timid an approach may undermine optimism that Britain is recovering from its worst recession in a generation. The vote for an even looser approach than his colleagues prefer defies King’s image as an advocate of tight monetary policy with a track record of backing interest- rate increases. The pound dropped after yesterday’s report.
“It proves he’s not just a hawk, he’s more of an activist,” said George Buckley, an economist at Deutsche Bank AG in London. “He’s not afraid to vote against the rest of the committee if he thinks it’s the right thing to do.”
The MPC voted 6-3 to increase bond purchases by 50 billion pounds to 175 billion pounds, the minutes showed. King was joined by Timothy Besley and David Miles in voting for an increase of 75 billion pounds. All nine opted to keep the benchmark interest rate at a record low of 0.5 percent.
‘Less Severe’
The pound weakened against all of the 16 most-traded currencies tracked by Bloomberg after the report. The danger from doing too much stimulus is “less severe” than the cost of being too cautious, the minutes said.
The pound fell as much as 0.8 percent against the dollar before rebounding later in the day.
“The bank is clearly taking the view that the recovery isn’t very sustainable,” said Jamie Dannhauser, an economist at Lombard Street Research Ltd. in London. “There’s very little damage that can come from doing too much stimulus.”
King’s vote suggests he may try to steer the central bank towards a further expansion of the purchase program at future decisions, economists say. The last time the governor was outvoted, in June 2007, he pushed through the quarter-point rate increase he wanted at the next month’s meeting.
Clear Signal
King typically casts the final vote at policy meetings, a practice which suggests he would have known he was on the losing side when he made the call.
“He made the choice to vote for more quantitative easing even though he knew it would make no difference to the decision,” said David Tinsley, an economist at National Australia Bank in London and a former central bank official. “It’s a clear attempt to signal the direction of his policy. He’s persuaded by the argument that doing more now is much less risky than doing less.”
King, who has now been outvoted three times since becoming governor in 2003, has rejected labels on his voting tendencies in the past and emphasized the importance of the 2 percent inflation target in the bank’s policy. He reiterated that mantra last week, saying the decision to increase bond purchases was justified by the fact that inflation may slow too much.
King says inflation, which stayed at 1.8 percent in July, could slow below 1 percent in coming months.
Brown ‘Determined’
King’s caution on the strength of the economy echoes Prime Minister Gordon Brown, who said last month that government officials are “determined to keep our focus” on the recovery. Brown must call an election by June 2010, and his ruling Labour Party trailed the opposition Conservatives by 14 percentage points in a YouGov Plc opinion poll ended on Aug. 14.
The U.K. budget deficit ballooned to 8 billion pounds in July, the largest for the month since records began in 1993, as the recession hammered tax receipts while unemployment benefit costs soared, the Office for National Statistics said today.
While surveys this month showed U.K. services expanded the most in 1 1/2 years and manufacturing grew for the first time in more than a year in July, unemployment has risen to a 14-year high. The economy contracted 0.8 percent in the second quarter, even as France and Germany returned to growth.
European Central Bank officials are also showing concern on whether the euro region’s economy can gain traction. Bundesbank President Axel Weber said in comments published yesterday he’s not yet convinced Germany’s recovery is sustainable after government stimulus measures helped the economy unexpectedly return to growth in the second quarter.
In the U.K., economists say King’s stance shows his determination to keep printing money and avoid the fate of Japan in the 1990s, where a delayed reaction to a banking crisis contributed to the country’s so-called lost decade.
“There’s a clear consensus that the situation is serious and it isn’t going to improve dramatically in the near term,” said Danny Gabay, director of Fathom Consulting in London and a former central bank official. “The message is that the MPC as a whole fears Japan more than Zimbabwe,” where inflation reached nearly 500 billion percent last September.
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
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