BOE Policy Makers Split Three Ways on Bond Program

By Brian Swint

Nov. 18 (Bloomberg) -- Bank of England policy makers split three ways in a vote to extend the bond-purchase program to 200 billion pounds ($336 billion), and discussed lowering the deposit rate on bank reserves to encourage lending.

While the majority of the nine-member Monetary Policy Committee wanted a 25 billion-pound increase, Chief Economist Spencer Dale favored no change and David Miles sought a 40 billion-pound expansion, minutes of the Nov. 5 meeting published in London today showed. They unanimously kept the benchmark interest rate at 0.5 percent.

“A reduction in the rate of remuneration relative to bank rate on a proportion of commercial bank reserves would bear down on short-term market rates and could ease monetary conditions further,” the minutes said. The committee “agreed that it might be a useful policy tool in some circumstances, and therefore should be available in future.”

The decision is the first three-way split since August 2008, before the collapse of Lehman Brothers Holdings Inc. exacerbated the financial crisis. A change in the deposit rate would expand the toolkit available to policy makers as they try to pull the U.K. out of its longest recession on record.

“It’s very much a case of keeping their options open,” said Alan Clarke, an economist at BNP Paribas SA in London. “These minutes are saying there’s arguments in both directions, and it’s going to be very data-dependent in the next three months.”

The pound rose 0.3 percent against the dollar today, trading at $1.6837 as of 10:02 a.m. in London. The yield on the 2-year U.K. government bond fell 2 basis points to 1.25 percent.

‘Costly to Rectify’

Dale said that an increase in the bond plan posed a risk to inflation, and “might result in unwarranted increases in some asset prices that could prove costly to rectify.”

Miles’s argument for expansion was that it would “provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply.”

While policy makers increased their forecasts for inflation and economic growth this month, Bank of England Governor Mervyn King said last week that he has an “open mind” about expanding the purchases further. The bank’s projections for the next two years show inflation approaching the 2 percent target even if the bank starts to increase interest rates next year and the total asset purchases stay at 200 billion pounds.

“Some members thought that that downside risks to activity in the near term were somewhat greater than implied by the inflation report projections,” the minutes said. “A number of committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn.”

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