King Push for 200 Billion-Pound Purchases Defeated

By Brian Swint

Aug. 19 (Bloomberg) -- Bank of England Governor Mervyn King and two other policy makers were overruled in a push to expand the bank’s bond-purchase program to 200 billion pounds ($329 billion) as the majority favored a smaller amount.

The pound fell after the nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds, according to minutes of the Aug. 6 decision released today. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

“All members agreed that substantial further asset purchases were needed over the next three months,” the minutes said.

King, who has now been defeated three times as governor, said last week it’s “likely” that inflation will slow below 1 percent this year and won’t return to the goal until at least the end of 2012. Investors scaled back expectations for interest-rate increases next year after the comments.

“I’m stunned,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former Bank of England official. “This sends a clear message that the bank is willing to do whatever it takes, and that’s encouraging. It’s more likely they’ll make extra purchases than start tightening over the next year.”

Pound Decline

The pound dropped 0.4 percent to $1.64 after the Bank of England minutes. The yield on the 10-year benchmark U.K. government bond slid 5 basis point to 3.602 percent.

An argument for a larger expansion of the bond purchases was that “insufficient stimulatory monetary policy” would harm confidence in the recovery. The risks of “another large stimulus might be less than the possible costs of acting too cautiously,” and the policy could be reversed if found to be “overly expansive,” the minutes said.

The argument for a smaller extension included that “the most immediate downside risks to the economy seemed to have receded.” The effects of the purchases were “uncertain,” risked “unwarranted increases in some asset prices,” and an early unwinding of the program might “prompt a sharp rise in market interest rates that was unwarranted by the economic outlook,” the minutes said.

Policy makers also agreed to keep the benchmark rate at a record low of 0.5 percent.

Outvoted

King has repeatedly said he’s comfortable being outvoted on the Monetary Policy Committee. He was defeated at the June 2007 meeting in a bid to raise interest rates to counter “upside” inflation risks. He was also outvoted in August 2005, when the committee cut the rate by a quarter point to 4.5 percent, a move criticized by some economists as spurring a housing boom that collapsed two years ago.

“The committee is a group of nine people who form their own independent view,” King said a week ago. “I’m sure there will come a time when we will start to see split votes again, just as, in the past, when we’ve been accused of always having split votes, there was sometimes unanimity.”

Policy maker Andrew Sentance wrote in an article for the Sunday Times on Aug. 16 that he expects a return to economic growth in the second half. 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, surveys show.

“The more timely indicators of economic activity, including business surveys, indicated that output in the United Kingdom had probably stabilized in the middle of the year,” the minutes said. While that “indicated that the likelihood of the very worst near-term downside risks to activity had lessened, they shed little light on the key question of how durable the recovery would prove to be in the medium term.”

Inflation unexpectedly held at 1.8 percent in July, instead of slowing as all economists in a Bloomberg News survey had predicted. Policy makers said that without more purchases, “nominal demand would likely be insufficient to prevent inflation remaining below the 2 percent target, perhaps substantially, throughout the forecast period.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.