Three-way split in Bank’s November QE decision

The Bank of England's Monetary Policy Committee (MPC) was split three ways in its November decision on the amount by which its asset purchase programme should be increased, minutes published on Wednesday showed.

The committee voted to maintain the bank rate at 0.5% and expand the asset purchase programme by £25 billion ($42 billion) over the next three months, taking its total size to £200 billion ($336 billion) earlier this month. The minutes showed seven members - including Mervyn King, the Bank's governor, and his two deputies - voted to expand the programme by £25 billion, citing a better balance between the risks of overshooting and undershooting the inflation target in the medium term. They also noted that a moderate expansion would support household and business spending and weaken downside risks from the continued fragility in the banking system and the inevitable prospect of government spending cuts.

However, David Miles, who joined the committee in June this year, wanted the programme extended by £40 billion, taking it to £215 billion in total. He argued that the larger sum would provide greater insurance against downside risks to growth and inflation, and would maintain a similar rate of purchases as the previous three months.

Spencer Dale, the Bank's chief economist, called for the programme to be kept unchanged at £175 billion. Dale cited the already "extraordinarily stimulatory" nature of policy, and uncertainty about the amount of spare capacity in the economy in his decision. "Dale's point is that too much quantitative easing is a risk, because it could boost asset prices and ultimately lead to inflation being significantly higher than desired. But the majority seem to be saying that if quantitative easing is withdrawn too soon, there's a risk of the kind of deflationary spiral that has dogged Japan, and I think the Bank would want to try harder to avoid the latter scenario because it's more difficult to break out of," Danny Gabay, the director of Fathom Consulting, told CentralBanking.com.

Gabay said the minutes would help correct opinion on the Bank's growth projections. "A lot of people took the Inflation Report as meaning that the Bank was very optimistic about growth, but that's not necessarily the case. The modal or most likely outcome is optimistic, but the mean or expected outcome is a full percentage point lower. There are clearly differences of views on the Committee," he said.

In the lead-up to the meeting, there had been calls for a £50 billion expansion to the programme from economists including former MPC member David Blanchflower, who pointed to government statistics showing the economy had shrunk unexpectedly for the sixth successive quarter, making it the exception to the global trend in resuming growth.

Stephen Lewis, the chief economist at Monument Securities said the Bank's accommodative stance looked set to continue. "The general tenor of the comment reported in the minutes does not suggest that MPC members intend to implement an 'exit strategy' any time soon," he wrote in his Economic Insights report. Gabay added that factors outside of the Bank's control would play a part in its eventual exit. "The minimum required would be to stop quantitative easing, and that's likely to happen by February, depending on what happens in the Christmas period and how the VAT changes affect consumer spending. But beyond that, a lot will depend on what happens in the May next year when the election takes place, because that will indicate how the fiscal landscape will play out," he said.

Some members also noted that if the expansion of the asset purchase programme has the desired effect, it would enable the Bank to bring forward the point at which extraordinary stimulus could be ceased. "They were not necessarily referring to the stock of quantitative easing here as 'extraordinary'; they might have meant the ultra-low level of interest rates," Lewis said.

Click here to read the minutes