BoE officials see chance of more stimulus

LONDON: More Bank of England asset purchases to boost Britain's weak economy are likely, even in the face of a worse short-term inflation outlook, a number of central bank officials said in policy minutes published yesterday.
The central bank said short-term inflation pressures were likely to squeeze consumers' disposable income, and that a global slowdown and euro zone tensions were hurting business confidence in an economy that entered recession late last year.
The BoE is midway through a four-month program of 50 billion pounds ($81.27 billion) of asset purchases that it started in July, and for all but one of the nine-member Monetary Policy Committee, it was a "straightforward" decision to carry on with it unchanged.
"Some of these members felt that additional stimulus was more likely than not to be needed in due course, while others saw the risks to inflation in the medium term as being more balanced around the target," the minutes of the MPC's Sept. 5-6 meeting said.
One policymaker argued that there was a "good case" to step up asset purchases now, rather than wait, but in the end all nine officials voted to keep interest rates at a record-low 0.5 percent and the asset purchase total at 375 billion pounds.
Economists said the minutes left intact their view that the central bank was likely to authorize another 50 billion pounds of government bond purchases in November, which would take total purchases to 425 billion pounds.
"I think there is still a dovish bias there," said Ross Walker, an economist at Royal Bank of Scotland. "It's not a done deal, but I would put about a 65 percent probability on a November decision (for more QE)."
There was little market reaction to the minutes.
British inflation has been above the BoE's 2 percent target since December 2009, and is now at 2.5 percent. A recent rise in oil prices, and the threat of higher food and utility bills to come, mean that inflation is likely to fall more slowly in the short-term than the BoE forecast in August, the minutes said.
However, the BoE targets inflation over the medium term, and here the impact of a short-term rise in oil prices is more muted, said RBS's Walker, as it pushes down consumer demand.
The BoE said it was concerned about the impact of rising employment at a time of weak economic output, as this caused lower productivity, potentially pushing up prices in the future.
Two BoE policymakers — Ben Broadbent and chief economist Spencer Dale — opposed July's restart to the quantitative easing program. Instead they have argued that the BoE's Funding for Lending Scheme, which offers banks cheap finance if they lend to businesses and households, is a better approach as it may help unblock some of the supply constraints in Britain's economy.
Here the evidence is mixed. The BoE said there were some encouraging signs that banks were lowering interest rates, and after the minutes were published, Lloyds Banking Group said it was drawing down 1 billion pounds of funds to lend on.
"This initial 1 billion pounds is just the start," said Lloyds' Chief Executive Antonio Horta-Osorio.
However, a report from the BoE's regional offices released alongside the minutes gave a different picture, saying that the cost of borrowing, especially for smaller companies, was creeping upwards as banks passed on higher funding costs.
The MPC did not materially change its view of the euro zone at September's meeting, which took place just before the European Central Bank approved steps to ease strains on countries such as Italy and Spain.
While business surveys, industrial output and retail sales backed its assessment of "modest underlying expansion", some expectations surveys were more worrying, the MPC said.
Britain's economy contracted by 0.5 percent in the three months through to June, but economists polled by Reuters see a 0.6 percent rebound in the third quarter as one-off effects fade and the London Olympics offer a modest boost.